The mirage of resilience: Why energy markets cannot shake off the Middle East risk

A direct clash between Iran, Israel and the US long stood as the nightmare scenario for global energy markets. Nevertheless, when the 12-day war between Iran and Israel broke out in June—followed by Israel’s strike on Doha a few months later—markets barely flinched.

Amid one the sharpest escalations of Middle East tensions in years, oil kept flowing. Gulf energy infrastructure emerged unscathed. Brent crude climbed 11% after the initial strikes in Iran, but soon fell below pre-conflict levels, reaching $67 after US president Donald Trump announced a ceasefire. Fears that a simultaneous Strait of Hormuz shutdown and Houthi attacks in the Red Sea would drive oil prices up to 35% never materialised.

This modest, short-lived wobble looked nothing like past shocks. The 1973 oil embargo quadrupled prices, the 1979 Iranian Revolution and the 1990 Iraqi invasion of Kuwait each doubled them. The second Gulf War in 2003 caused a 46% surge.

Several factors help explain this newfound resilience. However, it would be a mistake to conclude that Middle East instability no longer matters for global energy markets, or that Gulf producers have lost their power as market regulators.

Short- and long-term drivers

First, the transient factors behind the tempered market response: Israel targeted Iranian energy assets primarily serving domestic consumption rather than export infrastructure. Iran’s calibrated retaliation—a limited strike on the American al-Udeid base in Qatar that caused minimal damage—signalled de-escalation and helped pull crude prices down. Months later, Israel’s strike on Doha likewise had very limited impact on global energy prices as supply was not disrupted.

But there are also structural factors at play, such as sluggish global oil demand (exacerbated by Trump’s trade tariffs and weak Chinese growth). Key Gulf producers had also pre-emptively raised output in the weeks before the clashes. Saudi Arabia’s longer-term strategy of expanding output to squeeze out rivals further increased an ongoing trend of global oversupply.

Over the past decade, Gulf producers have also invested in redundancy, such as alternative export routes and overseas storage, to shield markets from shocks. Saudi Arabia’s east-west pipeline allows exports to bypass Hormuz entirely via the port of Yanbu in the Red Sea. The pipeline has a capacity of 5m barrels per day (bpd) and could probably take another 2m bpd. The UAE’s 1.5m bpd Habshan-Fujairah pipeline serves the same purpose. Both countries, along with Kuwait and Iran, also maintain large storage facilities in Asia and Europe.

There is also a deeper evolution in global energy markets that have contributed to the muted response. OPEC’s share of global supply has declined from over 50% in the 1970s to around 33% in 2023, with new producers such as the US, Brazil, Guyana and Canada fundamentally reshaping the landscape. The US shale revolution of the late 2000s has been a game changer, transforming the country from a major oil and gas importer into a net exporter.

The resilience paradox

Yet, ongoing instability in the Middle East could play a central role on global energy markets in the long run.

Strategic maritime chokepoints remain exposed to both state and non-state threats. The resurgence of Houthi attacks in the Red Sea confirmed the fact that these disruptions are not isolated incidents but part of a growing trend of proxy-driven maritime insecurity in the Middle East. The Iran–Israel ceasefire remains fragile, and Iran may continue to use proxies to disrupt shipping lanes and energy flows in the region.

Additionally, circumventing maritime chokepoints comes with costs. Alternative routes are often longer and more fuel-intensive—as in the case of the Cape of Good Hope—creating further pressure on energy demand.

Finally, predictions that the global energy transition will cancel out the impact of Middle East instability may prove overly optimistic. With key countries like the US questioning the pace of change, peak oil demand may not arrive until 2030, keeping global demand for liquid fuels above 100m bpd well into the 2040s. At the same time, declining output of major oil fields outside the Gulf and waning US shale productivity point to a renewed strategic role for Gulf producers, who are expected to remain the cheapest and cleanest hydrocarbons suppliers in the years to come.

As global demand slows, declining oil prices will likely weed out high-cost producers, further reinforcing the Gulf’s role. The share of the Middle East in global LNG production is also expected to increase from 16% today to 26% in 2050.

Tough choices for Europe

Europe should not mistake short-term resilience for lasting security

Europe should not mistake short-term resilience for lasting security. The continent continues to be exposed to instability in the Middle East, as reducing dependence on its energy will remain difficult given the geopolitical risk associated with other suppliers, such as Russia but also the US.

Investing in long-term stability and maritime security in the Middle East remains essential for Europeans, especially amid uncertainty over the American role. European policymakers should maintain active diplomacy with Iran while also pursuing a more ambitious and coherent strategy in the Gulf and the Red Sea—one that includes supporting partners in strengthening their own maritime security capacities. These efforts must not be deprioritised even if other urgent security challenges demand attention.

On the supply side, diversifying energy sources and accelerating the transition are the best way to improve market resilience against geopolitical shocks in the future. The REPowerEU framework remains very relevant and could be deepened and adapted to the vulnerabilities linked to instability in the Middle East. Expanding cooperation with major Gulf producers on energy security, crisis management and infrastructure resilience—within the framework of the EU–GCC Strategic Partnership—is vital. Gulf states can also play a critical role in advancing alternatives like hydrogen or investing in third regions such as North Africa, including in clean technology supply chains.

European policymakers will nevertheless face tough choices when trying to boost their energy resilience. In the short term, diversifying fossil fuel sources—such as through eastern mediterranean gas projects—risks locking in carbon-intensive infrastructure that conflicts with longer-term climate goals. Likewise, efforts to develop hydrogen production in North Africa for export to Europe could backfire if producing countries are unable to meet their own energy needs. Integrating all these elements into a cohesive and sustainable strategy will be crucial to balance energy security, climate goals and strong bilateral relationships.