Strait talk: Is the Hormuz Shock a Win for Renewables or a Lesson in Fossil-Fuel Risk?

In Brief

Whatever the ceasefire negotiations produce, the US-Iran conflict has forced energy markets, governments, and insurers to stop treating the Strait of Hormuz as reliable  and start pricing it as a genuine risk. That shift in how oil's vulnerability is understood is, arguably, a durable consequence worth watching. 

The conflict has altered the cost comparison between oil and renewables in ways that are partly lasting and partly temporary. Shipping costs will recover when traffic normalises; insurance rates will take longer; the conclusions that import-dependent governments drew about their own exposure will take longest of all. Renewable energy, by contrast, carries a cost structure that is heavily upfront but immune to shipping lanes, transit fees, and the insurance markets that govern them. The conflict made that distinction visible to people who had previously regarded it as an abstraction.

This is not a story about oil losing and renewables winning. Global oil demand will sit somewhere between 80 and 108 million barrels per day by 2040 on the most credible projections. The transition away from fossil fuels is real and measurable, and the Iran shock has accelerated its political momentum — but it remains gradual, expensive, and unevenly distributed. For lithium producers, the relevant question is whether that acceleration drives faster demand for the batteries at the centre of storage and electrification. The evidence suggests it does.

What Markets Had Priced Before the War

A useful starting point is how little the oil market expected a lasting disruption to Gulf supply before February 2026. Oil price futures — the contracts that traders and companies use to lock in prices months or years ahead — were running flat to slightly downward into 2026, reflecting, as financial analysis firm Macrobond put it in January 2026, "persistent scepticism toward any lasting geopolitical risk premium." Hedge funds had built near-record short positions in US crude futures at end-2025 — meaning large numbers of sophisticated investors were effectively betting that any oil price spike would be short-lived.

That positioning reflected a reasonable reading of recent history. Tanker attacks in 2019, the killing of Iranian general Qasem Soleimani in 2020, Red Sea disruptions in 2024 — each had produced a sharp price movement that deflated within weeks as supply adjusted. Markets had, across many such episodes, learned that Gulf oil disruptions were acute and temporary. The Strait of Hormuz — a 21-mile-wide channel between Iran and Oman through which roughly 20% of the world's seaborne oil and gas moves every day — was priced as reliable infrastructure.

The Iran conflict produced the disruption that this positioning had discounted. An estimated 10.5 million barrels per day of Gulf oil production shut in during April 2026 — more than 10% of total global daily consumption. Oil prices, which had been trading below USD 65 per barrel at the start of 2026, peaked at USD 138 per barrel in April and settled near USD 104 as of late May.

Goldman Sachs, in its March 2026 research note, made the structural argument that has since gained wide traction among analysts: even after flows normalise, oil prices will not return quickly to pre-war levels, because the conflict has forced a repricing of the risk of Gulf supply concentration into longer-term contracts — the contracts that govern investment and planning decisions over years rather than weeks. The bank called this a structural premium, as distinct from the kind of temporary spike that deflates once a crisis passes.

That remains a forecast rather than a certainty. A diplomatic agreement that fully reopens the Strait and allows Gulf production to recover could push prices back toward USD 70–75 per barrel by 2027 — the central scenario used by the US Energy Information Administration in its May 2026 outlook. But the probability distribution of where oil prices land over the next three to five years has shifted: fewer analysts expect a return to the low-USD 60s that characterised 2025, and most major banks have revised their longer-run price assumptions upward. Analysis.org's review of institutional forecasters in April 2026 found consensus clustering around USD 70–90 per barrel as a new equilibrium range, with a risk premium now embedded rather than applied temporarily. Pre-crisis forecasts calling for USD 60 oil, in their assessment, "feel like artefacts of a different market regime."

Three Things That Have Changed — With Different Durabilities

The conflict has shifted three distinct components of oil's cost infrastructure, each of which will unwind at a different speed.

The cost of physically moving Gulf oil spiked dramatically and will largely recover. Large crude tankers — the ships that carry roughly 2 million barrels of oil on a single voyage from the Middle East to Asia — saw their daily hire rates reach a multi-decade high of USD 423,736 per day at peak disruption, according to shipping data from LSEG cited by the EIA. The cost of transporting a barrel of Middle Eastern crude to eastern China jumped from roughly USD 2.50 to approximately USD 20 — an eightfold increase in a matter of weeks. When the Strait normalises and the backlog of over 800 stranded vessels clears, freight rates will compress considerably. The lasting effect is not the rate itself but the number: shipping operators and their customers now know, from direct experience rather than theoretical scenario planning, how large the freight exposure becomes when Hormuz transit fails.

War risk insurance has moved and will take longer to return. Specialist marine insurers — including several large London-market underwriters — suspended coverage for Gulf voyages within days of hostilities beginning. Insurers who remained in the market raised their premiums by up to 50% almost immediately. Howden Re, a major reinsurance broker, concluded in March 2026 that the combination of the 2024–25 Red Sea disruptions and the 2026 Hormuz closure had established a new baseline rate for shipping insurance in the region — one the industry does not expect to fully reverse even after a ceasefire. The reason is structural rather than sentimental: insurers update their risk models after events that their prior models failed to anticipate, and those updated models take years to deflate back toward previous assumptions. Shipping on Gulf routes will be more expensive to insure for the foreseeable future, regardless of what happens in peace negotiations.

Government energy security planning has changed in ways that are the least easily quantified and the most durable. Countries that import most of their oil — across South and Southeast Asia, sub-Saharan Africa, and parts of Europe — spent the first quarter of 2026 watching the emergency oil reserves they had built up for exactly this kind of crisis prove insufficient for a disruption of this scale. Those reserves — the stockpiles held by governments and the IEA, the international energy security body — were designed for acute, short supply shocks: one country's output lost for a few weeks. The Iran conflict delivered something categorically different. The institutional learning from that mismatch — from watching a system designed for one type of crisis encounter a larger one — may shape energy investment planning for years. The Centre for Strategic and International Studies in Washington captured the directional consequence in March 2026: import-dependent governments would see new strategic motivation to build their own energy generating capacity, starting with renewables, and to accelerate the electrification of their economies.

The Real Comparison: What Oil and Renewables Actually Cost

The Iran conflict has not changed the underlying economics of renewable energy, but it has changed the mental framework within which those economics get evaluated. This shift may matter for investment decisions.

The standard method for comparing the cost of producing electricity from different sources is called the levelised cost of electricity, or LCOE — essentially the total cost of building and running a power plant over its lifetime, divided by the amount of electricity it produces. Before the conflict, that comparison already favoured renewables decisively over new fossil fuel generation in most major markets. Wood Mackenzie found in October 2025 that utility-scale solar in the Middle East and Africa was generating electricity at USD 37 per megawatt-hour — roughly the cost of powering a home for an hour using about 1,000 watts of appliances — making it among the cheapest sources of electricity anywhere in the world by any technology. Europe's renewable costs fell a further 7% in 2025. The UK government's own figures show new onshore wind and solar coming in at GBP 41–48 per megawatt-hour, against new gas generation at GBP 124 — roughly three times as expensive.

The key asymmetry that the Iran conflict has made viscerally obvious is where each technology's costs sit. Gas and oil-fired power plants have relatively modest upfront construction costs, but their ongoing running costs depend entirely on fuel — and fuel must be purchased continuously, transported across shipping lanes, insured against maritime risk, and priced by a market that the events of early 2026 have demonstrated can move by 50% in a matter of weeks. Solar and wind farms cost substantially more to build, but once built, their fuel — sunlight and wind — arrives free of charge, irrespective of what is happening in the Persian Gulf. This asymmetry was always in the data. What changed in 2026 is that the operational reality behind it became impossible to treat as theoretical.

There is a genuine complication on the renewables side, and it deserves honest treatment. A peer-reviewed study published in 2025 confirmed that renewable energy projects are more sensitive to interest rates than fossil fuel plants, precisely because so much of their cost falls upfront as construction expenditure. The oil-price inflation triggered by the Iran shock has pushed interest rates higher in many economies, which raises the cost of borrowing for solar and wind projects. In the United States without government subsidies, solar generation currently costs roughly USD 9 per megawatt-hour more than modern gas-fired generation at prevailing interest rates. The Iran conflict has simultaneously strengthened the strategic argument for renewables and made them slightly more expensive to finance. Those two effects partially offset each other, and how the balance falls depends on each country's interest rate environment, policy support, and access to capital.

The net conclusion is that the conflict has widened the perceived gap between the risk of depending on oil and the risk of investing in alternatives — without eliminating the financing headwinds that renewable projects navigate in a higher-rate environment.

Four Assumptions That Have Been Revised

Energy markets, like all markets, run on assumptions that rarely get examined until an event forces the issue. The Iran conflict has forced the examination of four.

The first is that the Strait of Hormuz is reliable infrastructure. For decades, analysis treated a Hormuz closure as a low-probability tail risk — the kind of scenario that appears in stress tests but does not enter central planning assumptions. That assumption no longer holds. Markets, insurers, and government energy planners now assign meaningful probability to partial or conditional Hormuz access even in periods of relative calm. A ceasefire does not reset that probability to zero.

The second is that cheap oil is a headwind for the energy transition. The standard argument ran like this: if oil is cheap, electric vehicles are less attractive to consumers, and governments face less urgency to build renewable capacity. The argument assumed that oil would remain structurally inexpensive — a reasonable assumption in 2025, when a supply glut was pushing prices toward USD 60. The conflict has revised that assumption. Major banks have all raised their longer-run oil price estimates. At USD 90 per barrel, electric vehicles are considerably more attractive on running costs than at USD 60; at USD 100, the IEA's own cost-of-ownership calculations show them competitive in every major market without any subsidy adjustment.

The third is that governments' emergency fuel reserves would buffer large supply shocks. The coordinated release of over 570 million barrels of strategic reserves — stocks held precisely for this kind of emergency — could not contain the price spike from a disruption of this scale. Those reserves were sized for a different threat. Governments will reassess the adequacy of their buffers, and some of that reassessment will translate into investment in domestic energy production — including both domestic oil and gas where it exists, and renewable capacity where it does not.

The fourth concerns OPEC, the cartel of major oil-producing countries that has managed global oil supply — and to a significant degree, its price — for decades. The UAE, one of its largest members, announced its departure from the organisation on 1 May 2026. The UAE had been limited by OPEC production quotas to around 3 million barrels per day, against an actual production capacity closer to 4 million. Operating outside those quotas, the UAE can expand output and contribute to a post-conflict supply recovery — which will moderate prices somewhat. But a weakened OPEC also means less coordinated supply management over the medium term, which tends to produce more oil price volatility rather than less. Greater volatility itself raises the cost of depending on oil, reinforcing the same planning conclusions that the disruption itself generated.

What This Means for Lithium

Oil is not being replaced. The most credible industry projections — from Bain's 2026 global energy modelling — put global oil demand somewhere between 80 and 108 million barrels per day by 2040 across the full range of energy transition scenarios. The transition away from fossil fuels is real, it is measurable, and its pace has been accelerated by the security arguments that the Iran conflict has added to the economic ones. It is also gradual, uneven, and expensive.

What has shifted is the weight given to oil's risk profile when governments and companies compare it against the alternatives. Battery storage and renewable energy — the technologies that reduce dependence on oil — now carry a clearer security justification alongside their cost justification. And decisions made on security grounds tend to move faster, and draw on different budget lines, than decisions made on economic grounds alone.

For the producers of lithium — the mineral that sits at the centre of every battery used in electric vehicles, grid storage, and the broader electrification of energy systems — the acceleration of that investment matters more than any individual oil price reading. The second article in this series examines what the resulting demand for lithium actually looks like, and what it means for the upstream producers who will supply it — particularly in Zimbabwe and across Sub-Saharan Africa.

George  Katito is  the Founder/CEO of Geostratagem.

Sources: Goldman Sachs Research, March 2026; Analysis.org, April 2026; Macrobond, January 2026; EIA Short-Term Energy Outlook, May 2026; Howden Re, March 2026; CSIS, March 2026; Wood Mackenzie, October 2025; Imperial College London Grantham Institute; PMC / Cell Press, 'Financing costs and the competitiveness of renewable power', 2025; Capital.com, May 2026; Bain Global Energy and Materials Outlook, April 2026; IEA Global EV Outlook 2025; IEA Renewables 2025; World Bank Commodity Markets Outlook, April 2026; UK Parliament House of Commons Library CBP-10636, April 2026.