The U.S. and Israel attacks on Iran and subsequent stifling of oil supplies from the Middle East “will redraw the global energy map,” Fatih Birol, chief of the International Energy Agency, said at an event Tuesday. Then he delivered a word of caution: “We are not going back to where we were.”
International Energy Agency Executive Director Fatih Birol said the Iran war is having irreversible impacts on energy policies. | Omar Havana/AP
The question of what comes next has dominated the International Monetary Fund and World Bank spring meetings in Washington this week. Officials from the U.S. and other nations spoke vaguely of diversifying energy sources as a likely result of Iran’s closure of the Strait of Hormuz, through which one-fifth of the world’s oil and one-third of its fertilizer travels.
To some, that meant switching shipping routes away from the Persian Gulf. To others, it meant finding oil and gas outside the Middle East. Or harvesting local coal reserves. Or perhaps restarting mothballed nuclear power plants. In many cases, it means expanding renewable energy to curb reliance on other nations in an increasingly fractured, volatile world.
“History shows us that a crisis of this magnitude is also a catalyst,” Masato Kanda, president of the Asian Development Bank, told a gathering at the Council on Foreign Relations on Wednesday.
It comes amid bleak economic forecasts. The IMF is projecting slower growth and higher inflation, even if the war comes to a relatively quick conclusion, an outcome that is highly uncertain.
The impacts will be felt unevenly, with low-income, import-dependent countries bearing much of the pain. In a severe scenario, where energy supply disruptions extend into next year, global growth could fall to just 2 percent, the IMF said.
It’s a message that has echoed through the halls of this week’s meetings. How the world energy map is redrawn stands to have deep implications for supply and demand and for how new infrastructure related to both fossil fuels and clean energy is financed.
The meetings come as the economic impacts of the war start to bite pocketbooks worldwide, with countries often girding for worse case scenarios. While the globe is less oil intensive than it was during the oil crises of the 1970s, the IEA says the size of this shock is far greater.
“Intuitively, you would imagine that this would encourage diversification away from the fuels that are in short supply now,” said Tim Gould, chief energy economist with the IEA.
But diversification takes many forms, and Gould questioned the global appetite for major new supplies of liquefied natural gas being produced in the United States.
“Has gas taken a reputational hit? Are they willing to trust that this is a reliable and affordable fuel?” he said, referring to Asian importers or others. “That’s an interesting open question for the next few years.”
Import-dependent countries such as Pakistan and Thailand have used the moment to emphasize their desire to transition faster to renewables. Pakistan’s rooftop solar boom — sparked in part by natural gas price spikes in 2022 — have helped cushion it from the current supply shock.
“We were on the right track,” the country’s finance minister, Muhammad Aurangzeb, said at an IMF panel this week. “But clearly we feel the journey needs to be accelerated.”
Pakistan has made strides to install rooftop solar panels after experiencing weather disasters and energy shortages. | Fareed Khan/AP
Thailand’s finance minister, Ekniti Nitithanprapas, echoed that sentiment, pointing to rising costs for oil and gas imports.
“Because of the higher price at the moment, it forces you to transform,” he said. “That’s why we provide … tax incentive [for people] to put solar on their house.”
Nitithanprapas also talked about leveraging investments to expand physical infrastructure such as smart grids and battery storage. That’s something the Asian Development Bank is supporting through a $10 billion program to advance regional connectivity in Southeast Asia.
Kanda, the ADB chief, also called for the pursuit of nuclear power and other alternatives. He acknowledged that while Asian countries have turned to coal to ride out supply challenges with gas, he does not see a long future for that fuel source.
Calls for diversification have gotten support from the World Bank and IMF, which are urging countries to prioritize domestic resources rather than pay for rising dollar-denominated barrels of oil.
“Often that means renewables, so we’re likely to see a big push in that direction,” said Pierre-Olivier Gourinchas, the IMF’s chief economist.
For Middle Eastern oil producers, the transition looks less imminent, even as they grapple with having to repair facilities damaged in the conflict or restart production after prolonged shut-ins.
“People, they want[ed] to move away from oil and gas for many years. They could not achieve it. So it will take much longer,” Ali bin Ahmed Al Kuwari, Qatar’s finance minister, told POLITICO. “It is so difficult now at this stage, really, to have a replacement for energies.”
The enduring need for fossil fuels is something President Donald Trump is banking on as his administration positions itself as a reliable supplier of oil, gas and coal amid the ongoing conflict. For now, shipments of U.S. crude are up as countries scramble for supplies, but that also comes with knock-on effects such as higher gasoline prices.
Treasury Secretary Scott Bessent at the World Bank/IMF spring meetings in Washington on Thursday. | Jose Luis Magana/AP
Bessent praised the World Bank’s “all-of-the-above” energy strategy and emphasized the importance of energy innovation.
“In the U.S. we were going to run out of crude and crude derivatives,” he said at the Institute of International Finance on Tuesday. “And then fracking was invented. And now the U.S. has larger reserves than Saudi [Arabia] and Venezuela.”
One day later, Bessent called on the bank to drop its climate finance target, which sets a goal of spending 45 percent of its lending on projects that deliver climate benefits. It expires in June. He also cast doubt on the role that fossil fuels are having on higher temperatures.
Wood Mackenzie, the energy analytics firm, expects shale gas to see a reemergence as countries including Mexico and Australia prioritize energy security.
Regardless of what nations see as a solution, their refrain this week was that no one is immune from the war’s disruption.
“Oil producing countries may see the transmission of higher oil prices into higher revenues. That’s totally different from oil importing countries, but it’s also not a one way street,” said Adebayo Olawale Edun, Nigeria’s minister of finance and the chair of the G24, a group of developing countries. “Gas prices, fertilizer and food prices … on both sides, this crisis is affecting countries.”
That’s to say nothing about climate change. John Kerry, the former secretary of State, has long argued that cleaner energy sources are needed to address rising temperatures. Now, the war might lead to that outcome, he suggested.
“The greatest changes in energy globally have come when there have been the biggest disruptions,” Kerry, who was climate envoy under former President Joe Biden, said at a Semafor event Wednesday.
He pointed to France’s embrace of nuclear power following the Arab oil embargo in 1973 and clean energy measures taken by the EU after Russia’s invasion of Ukraine.
“You really have to control your sources of energy,” said Kerry. “It’s my belief that one of those moments of transformation is here now.”
