June 27, 2025

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Iran-Israel Conflict Demonstrated Vulnerability of Global Energy Supply Chains

AP Photo/Vahid Salemi

After 12 days of missile and drone exchanges between Iran and Israel, and the U.S. striking Iranian nuclear facilities last week prior to a ceasefire, global oil and gas markets remained on high alert, reminding the world once again how energy markets and geopolitics are inextricably linked. The price of Brent crude fluctuated as the market followed the continually changing situation over the course of the conflict. Prices rose following the U.S. strike on Iranian nuclear sites but have since cooled following U.S. President Donald Trump’s announcement of a ceasefire earlier in the week. Throughout the conflict, Israel struck domestic critical infrastructure facilities in Tehran, such as the Shahran fuel depot in northern Tehran and the Shahr Rey oil refinery in southern Tehran. Israeli missiles also hit a section of the South Pars gas field, the world’s largest gas reserve and a critical supply point to Iran’s national reserve. Iran responded to these attacks by striking Israeli infrastructure, such as a refinery in Haifa, damaging pipelines and creating a partial shutdown. Additionally, strikes also damaged a central power grid in Haifa, a city that remained on high alert throughout the duration of the conflict.

The war highlighted the dangers to energy infrastructure on both sides, and while a tenuous ceasefire is now in place, it is not difficult to imagine a return to fighting, either weeks or months down the road, pending developments in both Iran and Israel. If the conflict is rekindled, strikes on energy infrastructure, including Iran’s primary export facility – Khrag Island – could be on the table. Moreover, in a future war, Iran may seek to follow through on threats to close off the Strait of Hormuz, a critical oil supply route and one of the most consequential chokepoints in the world. As the lone maritime entry point into the Persian Gulf, the Strait splits Iran on one side and Oman and the United Arab Emirates (UAE), on the other. It links the Persian Gulf to the Gulf of Oman and the Arabian Sea in the Indian Ocean.

While closing off the Strait of Hormuz or lining it with sea mines would be disastrous for the global economy, and indeed for one of Iran’s primary allies, China, it is a card that the Iranians could play, even as a measure of last resort. If Iran were to attempt to block the Strait, or if oil exports were significantly disrupted, it would send tremors throughout Wall Street and beyond, roiling the global oil market. Approximately 20 million barrels of oil transit through the Strait of Hormuz each day. A recent report released by the International Atomic Energy Agency (IAEA) stated: “Closure of the Strait, even for a limited period, would have a major impact on global oil and gas markets.” Bloomberg also reported that Qatar had asked its liquid natural gas (LNG) vessels to wait outside the Strait until they were prepared to load, highlighting the severity of the tensions over the past few weeks.

Throughout the 1980-1988 Iran-Iraq War, ships and commercial vessels were regularly attacked by both sides, in what became known as “the Tanker War.” Still, during those eight years, the Strait was never completely closed down. Six years ago this month, multiple vessels, including oil tankers, were struck off the coast of UAE. While Iran denied its role, the Trump administration (during Trump’s first term) blamed Tehran as the culprit. Should Tehran decide to shut down the Strait, its closure would impact Iran itself, as it uses the Strait to export oil to its biggest customer: China.

The People’s Republic of China (PRC) relies heavily on energy imports from the Middle East and the escalating conflict poses a challenge to Beijing’s energy security. The PRC is the world’s largest importer of crude oil (around 11 million barrels/day), with about half of it coming from the Middle East. In 2025, the PRC increased its dependency on LNG imports from Qatar due to the tariff escalations with the U.S. – with Qatar supplying 33.4 percent of the PRC’s total imports between January and April 2025. Due to Western sanctions, the Iranian market has proven attractive for cheap oil exports by smaller refineries in the PRC, so-called “teapot” refineries.

While sanction efforts against Iran’s oil industry complicate the accurate assessment of PRC import data on Iranian oil, a recent estimate from Kpler suggests 90 percent of Iran’s oil exports go to the PRC. An estimated 15 percent of China’s crude imports came from Iran in 2024. However, even prior to the two-week conflict between Iran, Israel, and the U.S., data suggested that PRC imports of Iranian oil had decreased in 2025, possibly due to tightening U.S. sanctions coupled with a weakened refinery demand in China. In 2025, the U.S. has increased sanctions against Iran’s oil supply chain, including secondary sanctions on PRC entities and individuals, noting that “[t]he Iranian regime uses the revenue it generates from these sales to finance attacks on U.S. allies, support terrorism around the world, and pursue other destabilizing actions.”

However, Trump posted on Truth Social on Wednesday that China can “now continue to purchase oil from Iran.” Experts have questioned the meaning of the post, wondering if it could be interpreted as Trump abandoning the hardline U.S. policy of using sanctions to place maximum pressure on Iran. Trump recently stated at a news conference during the NATO summit this week that “[Iran’s] going to need money to put that country back into shape. We want to see that happen,” citing a potential easing on sanction enforcement though he has claimed the U.S. has not given up its maximum pressure policy. Nevertheless, according to Foreign Policy, the extra revenue would bring in at most $4 billion a year.

The recent war between Israel and Iran, and the close involvement of the United States, was a reminder to China about just how precarious relying on Iranian oil export sites and shipping routes in the Persian Gulf can be. In turn, this could prompt Beijing to consider alternative energy routes for long-term strategic gain while it focuses on energy diversification at home. In the 21^st century, the PRC has looked to diversify energy imports through gas pipelines in Russia (Power of Siberia-1) and Central Asia (the Central Asia-China Gas pipeline). Moscow has been in discussions with Beijing over building another pipeline, the Power of Siberia-2, which has been delayed, with negotiations largely slow-walked by the PRC. Recent events in the Middle East may increase the appeal of finalizing an agreement on Power of Siberia-2, with discussions reportedly being revived following PRC President Xi Jinping’s visit to Moscow in May. At a recent regional summit between the Central Asian countries and the PRC, President Xi signed a treaty to deepen cooperation with the five countries on trade, energy, and infrastructure. In a bilateral meeting with Turkmenistan's president, discussions included expanding the scale of natural gas cooperation between the two countries.

Throughout the conflict, prices reflected that the market was not willing to react harshly unless there was a disruption to supply. However, there remains a risk that supply disruptions could occur if the ceasefire breaks. In this instance, Tehran could find itself backed into a corner and attempt to exploit the oil market as leverage, even as the Trump administration actively seeks to lower oil prices. It is also unclear, should the conflict start up again, if Iran would utilize its proxies to target regional oil and gas facilities as another tool to exploit the market. This scenario draws comparisons with the Houthi attacks on Saudi Arabian oil facilities, particularly in 2019 when drone attacks on two Saudi Aramco sites suspended production, causing the loss of 5.7 million barrels, equivalent to approximately half of Saudi Arabia’s daily output.