Global supply shocks shatter the energy independence myth; Europe's situation is perilously precarious.

The supply disruptions in the Strait of Hormuz are impacting all regions: Asia faces the largest supply shocks, Europe struggles with import dependency and competition for liquefied natural gas, while the U.S. sees fuel prices soaring.

Asia is scrambling for alternatives (including Russian oil and increased coal usage), while Europe is losing liquefied natural gas supplies to higher-bidding Asian buyers, leaving its own situation still precarious.

Even the energy-secure U.S. market is affected, as global crude oil prices drive gasoline and diesel prices sharply higher, highlighting the interconnectedness of energy markets.

The sudden disruption of oil and liquefied natural gas supplies from the Strait of Hormuz is reverberating across all major energy-consuming regions, exposing energy security issues in Asia, Europe, and the U.S.

No region can escape the effects of the largest disruption in oil market history, although some areas suffer more in terms of supply tightness than others. But all regions are seeing fuel prices surge, and the threat of accelerating inflation is very real, with no interest rate cuts expected in the short term.

Asia is experiencing the largest and most urgent disruptions, while Europe loses out to Asia in the competition for liquefied natural gas supplies and remains heavily reliant on gas and oil imports. Although the U.S. theoretically has the safest domestic supply, its diesel and gasoline prices are seeing unprecedented surges due to the refinery business’s close ties to global oil prices.

China’s buffer in the Asian supply shock

The supply shock faced by Asia is significant. The region relies heavily on liquefied natural gas and crude oil supplies from the Middle East, most of which—if not all—used to be transported through the Strait of Hormuz.

Asian buyers are racing to meet supply demands by purchasing Russian oil now allowed to be transported by tankers, as well as crude oil from more distant regions (including the U.S., West Africa, and Brazil).

Kpler senior crude oil analyst Xu Mu Yu stated earlier this week, “While the release of strategic oil reserves in Japan, South Korea, and possibly more Asian countries is expected to help refiners overcome current supply shortages—likely just from late March to a few weeks in April—this policy stopgap cannot address the supply gap in the long term.”

Asian countries have increased coal usage in power generation as much as possible to try to compensate for the 20% loss in global liquefied natural gas flows caused by Qatar’s production cuts and the effective closure of the Strait of Hormuz.

As supply competition resumes, Asia is attracting most flexible destination liquefied natural gas cargoes away from Europe.

However, prices are so high that many countries in the region will only buy in order to avoid emergencies.

Interestingly, as the world’s largest oil and liquefied natural gas importer, China is not as easily impacted as its massive import figures suggest. China’s reliance on Qatari liquefied natural gas is estimated to account for 6% of its gas supply structure, and it has built up substantial crude oil inventory buffers over the past year at lower oil prices.

Europe falls back into dependency

Asia, as the largest consuming region, is feeling the physical supply tightness, but Europe’s situation may be even more precarious. It relies on imports for half its supply and is a secondary victim of soaring oil and gas prices, as Asia now commands the premium that attracts available spot liquefied natural gas supplies.

According to data from the Energy Research Institute cited by columnist Gavin Maguire, Europe is the least secure region when measured by import share.

Europe relied on Russian gas before 2022 and has since shifted to U.S. liquefied natural gas after the Ukraine war. It has increased the share of U.S. liquefied natural gas in its gas supply, but now a large portion of the more flexible U.S. supply is flowing to the highest bidders—Asia.

Given that global liquefied natural gas supplies have already suffered massive disruptions, Wood Mackenzie’s vice president of gas and LNG research, Massimo DiOdoardo, stated earlier this month: “Both the Asian and European markets need to draw more on existing inventories and increase demand for summer replenishment. This will keep market conditions tight for a long time even after trade through the strait eventually resumes.”

Energy dominance does not shield the U.S. from soaring fuel prices

In terms of reliance on foreign supply, the U.S. appears to be the least vulnerable, as data from the Energy Research Institute indicates that its domestic oil and gas production could theoretically cover 108% of energy demand.

However, despite being a net exporter of oil, the U.S. still needs to import heavier grade crude oil, as refineries cannot run solely on the light crude from domestic shale fields. According to the Energy Information Administration, crude oil imports account for about three-quarters of total U.S. crude oil imports.

The American Fuel & Petrochemical Manufacturers Association states that nearly 70% of U.S. refining capacity operates most efficiently with heavier crude oil. That is why 90% of U.S. crude oil imports are heavier than the domestically produced shale oil.

Even though the U.S. is the world’s largest crude oil producer, its refining market and fuel prices are not an island; they depend on global oil prices, which have surged significantly since the start of the Iran war.

The result is that gasoline and diesel prices are skyrocketing.

GasBuddy’s head of petroleum analysis, Patrick De Haan, noted that just on Wednesday alone, Americans spent about $350 million more on gasoline than they did on February 28 (the day the U.S. began its offensive against Iran). Since February 28, Americans have spent an additional $3.7 billion on gasoline. GasBuddy also estimated that the rise in diesel prices is unprecedented—with the largest increases in diesel prices seen in two, three, and four weeks in history occurring this week.

De Haan pointed out, “Prices haven’t hit all-time highs—but the speed of this increase is unprecedented.” The massive supply shocks caused by the Middle East war are sweeping through every major market.