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Speaking at Chatham House, Dr Birol, Executive Director of the International Energy Agency, said Strait of Hormuz closures and rising summer demand could push oil markets into a ‘red zone’.

Dr Fatih Birol, Executive Director of the International Energy Agency, visited Chatham House on 21 May to discuss the continuing Strait of Hormuz crisis, US energy policy, the global impact of renewable energy and artificial intelligence, and the UK’s own energy security debate.

Dr Birol said the current crisis was having a greater impact than the three biggest previous major energy shocks combined – the 1973 Mideast war and oil embargo, the 1979 Iranian Revolution and the 2022 Russian invasion of Ukraine.

‘This crisis is bigger, I would say much bigger, than all three crises in history put together,’ he said.

Asked his position on the UK’s energy policy, Dr Birol said ‘the future of the UK energy system is electrification’, which might be powered by renewables, nuclear energy and natural gas. ‘If the UK wants to be a strong, sovereign industrial country I see electrification as the future,’ he said.

Addressing the debate about renewed drilling in the North Sea, Dr Birol said it would be expensive, adding: 

‘I don’t still understand how in the UK this becomes a discussion’. He pointed out that even in the US, the largest energy exporter in the world, consumers are still affected by the international oil price, so new North Sea exploration would not affect global oil prices – or reduce prices for UK consumers.

‘I don’t know how the UK can think you can have an impact upon the international oil prices, you cannot. The UK – whatever the field you produce, develop – the UK is a price taker, not a price maker, and it will stay like this.’

He also warned that opportunists may seek to exploit high global oil prices caused by international factors for domestic political reasons:

‘What I’m afraid [of] is the following: the international energy prices, as a result of this, they are going to increase. And they are increasing. And this will affect the domestic prices in the petrol stations, in heating, and so on.

‘In fact, the governments in, let’s say, Europe or UK, or whatever, they don’t have much to do with this, it’s international tension.

‘However there may be some extreme groups – political groups – who can abuse this as a failure of the existing political system in their countries,’ he said.

Summer ‘red zone’

Addressing the situation in the Strait of Hormuz, Dr Birol said trust in supply from the region had been damaged – ‘the vase is broken’ – and that huge efforts would be needed to restore it. 

The world could hit a ‘red zone’ in July or August if the Strait remains closed, he warned.

Laying out the context of the present crisis, Dr Birol said that the global economy was ‘fortunate’ that before the war started there was a surplus of oil in the markets, what he called ‘lots of buffer’.

This was compounded by the IEA’s decision to release a ‘huge amount’ of oil stock onto the market on 11 March, and by the fact that some countries, companies and the industry itself had their own stocks.

But, he said, they were now ‘coming to the end’ of those reserves, just as the travel season is due to begin in late June and early July, pushing push oil demand and consumption up.

‘This may be difficult, and we may be entering the red zone in July or August if we don’t see that there are some improvements in the situation. This is how I see it,’ he said.

As well as the outlook for energy, Dr Birol also outlined the threat of inflation and a food supply shock caused by rising prices, especially upon emerging economies. He cited in particular three crops seen as the ‘backbone’ of the agricultural sector: wheat, rice and maize, with 60% of their production costs coming from fertilizer and diesel.

Higher food prices

‘As we are approaching the travelling season, we are also approaching in many countries the planting season, farming season. And many farmers will have difficulties in this context to go ahead as they were doing in a normal year, and this may feed into higher food prices. And higher food prices, together with the higher oil prices may push up the inflation,’ he said.

‘And we are already seeing the first signals of the inflation numbers going up here and there, and it is just the beginning. My very hope is that, of course, the Strait is open, fully and unconditionally.’

During the event Dr Birol also discussed the impact of artificial intelligence on energy security and the growth of affordable electric cars in China and southeast Asia.

Electric cars

‘Five or six years ago only 5% of all the cars sold was electric, and this year we expect about 30%. And – I have to put a disclaimer here – I expect many countries will react to this crisis, many countries around the world. They have done in the 1970s. They may give a push to the electric cars’ penetration, given subsidies and so on.  Already there are two or three countries doing this,’ he said.

‘We say that this year – even without considering these additional policies that may be coming – this year from 5% five years ago, it will reach about 30%. This is very important. And if people think it is only China, it is wrong. 

‘It is happening in China. In China today almost 60% of all the cars sold is electric. But now when we look at the numbers, especially in southeast Asia, which is a very important centre for energy demand – with electric cars, penetration is very, very high. And this will have implications for the car manufacturing industry, but also for the energy industry as well.’