By Stefan Liebing

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The military escalation in the Middle East and the threat to the Strait of Hormuz once again highlight the structural vulnerability of the global energy supply. The strait between Iran and Oman is one of the most important bottlenecks in the international energy system. According to the U.S. Energy Information Administration, around 20 million barrels of crude oil and oil products pass through this route every day, which corresponds to around 20 percent of global oil consumption (EIA 2024). A significant proportion of global LNG exports from Qatar are also transported via this sea route. Even the expectation of a disruption can trigger significant price reactions. Energy markets are sensitive to geopolitical risks, as energy has very low short-term demand elasticity. Even small changes in supply can therefore trigger disproportionate price movements. The International Energy Agency points out that geopolitical tensions regularly lead to “significant price volatility even in the absence of large physical supply disruptions” (IEA 2023). The current situation thus shows a fundamental challenge for modern economies: Energy prices are not just a question of resources, but increasingly a question of geopolitical security.

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Oil: A market with geopolitical risk premiums

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The oil market is highly globally integrated. Crude oil can be transported relatively flexibly, which can partially compensate for regional production losses. Nonetheless, disruptions to central transport routes result in significant price shocks. One factor that is often underestimated is the logistics of the oil trade. There are around 800 Very Large Crude Carriers (VLCCs) worldwide, each with a transport capacity of around two million barrels of crude oil (Clarksons Research 2024). If important trade routes are blocked or transport routes are significantly extended, the available transport capacity of the tanker fleet decreases. In addition, insurance premiums for tanker transport rise significantly in conflict regions. War risk premiums can multiply during geopolitical crises and reach several hundred thousand dollars per ship and voyage (Lloyd's Market Association 2023). These costs are directly factored into oil prices.

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For Germany, this means that even if production volumes remain unchanged, global prices may still rise. Although Germany imports crude oil from various regions – such as Norway, Kazakhstan, and the US – the price is determined on the world market. National politics can hardly influence this development. In the long term, the situation reveals a structural problem in the global energy industry: The largest oil reserves are often located in politically unstable regions. According to the Energy Institute, around 48 percent of global oil reserves are in the Middle East, while Venezuela alone holds around 18 percent of the world's reserves (Energy Institute 2024). At the same time, there has been less investment in new funding projects for years. According to the International Energy Agency, global investment in oil and gas production in 2020 was about 40 percent below 2014 levels, and has only partially recovered since then.

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A less discussed consequence of this development is the increasing concentration of production capacities among state-owned oil companies. While international oil companies have reduced some of their investments, state-owned companies now control around 55 percent of global oil and gas production and over 70 percent of reserves (IEA 2023). As a result, control over energy supply is increasingly shifting to more geopolitically sensitive structures. The OPEC spare capacity—i.e., production capacities that can be activated at short notice—traditionally plays a stabilizing role in the oil market. According to estimates by the International Energy Agency, this reserve is currently around 4-5 million barrels per day (IEA 2024). However, the majority of this reserve capacity is located in the Persian Gulf itself and is therefore not available to mitigate the current crisis.

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Global oil supply in figures

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• Global demand: approx. 102 million barrels per day
• Transport by Strait of Hormuz: approx. 20 million barrels per day
• Middle East share of global oil reserves: approx. 48%

Largest reserves worldwide:

• Venezuela: approx. 18%
• Saudi Arabia: approx. 17%
• Iran: approx. 9%
• Sources: Energy Institute 2024; EIA 2024

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Gas: The LNG market as a geopolitical area

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The dynamics of the gas market differ significantly from the oil market. Gas was historically a regional asset because transport had to be carried out via pipelines. It was only the expansion of LNG infrastructure that created a global market. Europe has fundamentally changed its gas supply following the cessation of Russian pipeline gas supplies. Liquefied natural gas is now a central component of the supply. According to data from the European Commission, LNG accounted for around 37 percent of EU gas imports in 2024 (European Commission 2024). However, there is a structural risk in that Europe is increasingly purchasing on the global spot market for LNG. Many Asian countries, on the other hand, secure their supplies through long-term contracts. If part of these supplies is lost—for example, due to conflicts in the Persian Gulf—these countries must procure additional volumes on the spot market at short notice. This significantly intensifies competition for LNG.

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One frequently overlooked aspect is the physical availability of LNG liquefaction plants. The construction of an LNG export terminal typically takes five to seven years and often costs more than ten billion US dollars. Short-term expansion of supply is therefore hardly possible. The United States is currently playing a special role. Within just a few years, they have become the world's largest LNG exporter and have more than 20 percent of global export capacity (IEA 2024). At the same time, a large part of Europe's gas supply depends indirectly on this capacity. Any technical disruptions or political export restrictions would have an immediate impact on the European market.

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LNG market in figures

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• Share of LNG in EU gas imports: 37%

Largest LNG exporting countries:

• USA
• Qatar
• Australia

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• Share of the USA in global LNG exports: approx. 20%
• Investment costs for LNG terminal: >USD 10 billion
• Sources: IEA 2024; European Commission 2024

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Financial markets and price dynamics

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Another factor that is often underestimated is the role of financial markets in price formation. A large proportion of global oil trading takes place on futures markets such as the New York Mercantile Exchange (NYMEX) or the Intercontinental Exchange (ICE). The traded contract volumes exceed the physically traded volumes many times over. Financial investors, hedge funds and commodity funds therefore play an important role in short-term price movements. In geopolitical crises, speculative positions often rise due to rising energy prices, which can further intensify price movements (Fattouh & Mahadeva 2013).

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Refinery capacities also play a role in energy supply. In Europe, numerous refineries have been closed over the past two decades. Total European refining capacity has fallen by around 15 percent since 2008 (IEA 2022). Even if sufficient crude oil is available, bottlenecks can arise during processing. The same applies to storage infrastructures. While strategic oil reserves have been coordinated internationally since the 1970s, there is no comparable global system for gas so far. Although the European Union has introduced minimum fill levels for gas storage facilities, these measures are primarily intended to stabilize seasonal fluctuations rather than provide long-term crisis prevention. In Germany, storage facilities can contribute approximately 20-30 percent of winter demand, but cannot fully compensate for the theoretical case of a total failure.

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The security of supply premium

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A key challenge of energy policy is that markets often prefer the cheapest energy source in the short term, while security of supply is a long-term public good. One possible solution would be to introduce a security of supply premium in the energy market. This would give companies a financial incentive to diversify their energy supply more or to conclude long-term supply contracts. Such instruments already exist in other areas of energy policy. In the electricity market, for example, capacity mechanisms are used to keep reserve power plants economical. Transferred to the energy market, a security of supply premium could include the following elements:

• Government guarantees for long-term gas contracts
• Premiums for diversified energy imports
• Public institution participation in energy projects
• Risk hedging for infrastructure investments

The state would thus not directly regulate energy prices, but rather invest specifically in the resilience of the energy supply.

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Germany's primary energy imports (2023):

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• Crude oil: approx. 35% of primary energy consumption
• Natural gas: approx. 24%
• Coal: approx. 8%
• Overall import dependency: over 70% of primary energy
• Source: BMWK/AG Energiebilanzen

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Political options for action

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In the short term, Germany's options for action are limited. Energy prices are set on global markets and reflect the scarcity of available resources. Government price interventions or temporary tax cuts would therefore only lead to market distortions or high costs for the public sector, which would ultimately also have to be financed by the taxpayer in the form of increased borrowing. They should therefore be rejected as a matter of urgency. In the long term, however, several structural measures are conceivable. First, long-term supply contracts should be used more extensively again in order to increase security of supply. Second, the diversification of energy imports must be further advanced in order to reduce geopolitical risks. Third, strategic gas reserves could be built up, which could be used in crisis situations in a similar way to existing oil reserves. In addition, Germany should invest more heavily along the international energy value chain. Investments in production projects, LNG terminals, or transport infrastructure can create stable supply relationships.

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Another option, which has so far been little discussed, is for European states or consortia to act more strongly as anchor investors for new energy projects. Many funding projects are currently failing not because of geological resources, but because of financing and long-term purchase guarantees. Finally, diversifying the energy system remains key. The expansion of renewable energies and new energy sources such as hydrogen can reduce geopolitical dependencies in the long term. However, here too, it is expected that additional supply security will be associated with higher system costs.

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Conclusion

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The current energy crisis shows once again that global energy markets are heavily influenced by geopolitical risks. In the short term, Germany can barely influence such developments. Prices remain the central adjustment instrument of the markets. In the long term, however, a more resilient energy supply can be built up. This includes diversification of supply chains, investments in infrastructure, strategic reserves and greater integration of new energy sources. These measures increase security of supply, but also result in structurally higher energy costs. Germany must therefore adapt to an energy system in which security of supply is more important than short-term price optimization.

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Prof. Dr. Stefan Liebing is managing director of Conjuncta GmbH and honorary professor at the Department of Economics at Flensburg University. He specializes in issues of international economic relations and energy and foreign policy. From 2001 to 2011, he worked in the international oil and gas industry.

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