Oil and gas production halts in Iraq and Kuwait are expanding the Iran conflict’s influence on global energy costs, as the United States arranges insurance coverage and naval protection in reaction

Gulf Energy Output Disrupted Amid Strait of Hormuz Crisis

This week marked a significant downturn in Gulf energy production, beginning with Qatar halting the majority of its liquefied natural gas operations. Shortly after, Iraq and Kuwait also started to curtail output from their oilfields. There are indications that the United Arab Emirates and Saudi Arabia may soon implement similar measures.

These shutdowns are not solely due to direct military threats to the oil and gas fields—though some sites may be at risk. The primary issue is the near-total blockade of the Strait of Hormuz, a result of ongoing conflict involving Iran. With this crucial maritime passage effectively closed, Gulf energy exporters are left with limited routes to ship their products. As storage facilities reach capacity, producers are forced to scale back or halt extraction, triggering a domino effect across the region.

This reduction in output could have lasting consequences. Unlike flipping a switch, restarting oil and gas wells is a complex process. Shutting down wells can cause equipment malfunctions and geological complications, and even under optimal conditions, restoring full production can take weeks.

According to Sid Misra, a petroleum engineering professor at Texas A&M University, the real danger to the global energy system is not just the conflict itself, but the permanent damage that occurs when oil production is interrupted. Oil can become trapped underground as water fills the spaces left behind, making it impossible to recover through existing wells.

“When production stops, the oil isn’t simply waiting to be extracted later—it can become permanently inaccessible,” Misra explained. “Even after hostilities end, some of that capacity may be lost for good, reducing global supply and pushing up long-term energy prices.”

OPEC’s Flexibility and Market Response

Pavel Molchanov, an energy analyst at Raymond James, noted that OPEC members in the Middle East are particularly skilled at adjusting their output in response to changing circumstances. “Oilfields in this region have a long history of ramping production up or down, though usually for different reasons,” he said. “Depending on the field, it can take days or weeks to restore output—not months.”

U.S. Steps In with Insurance Solutions

Meanwhile, the United States is addressing another challenge unsettling energy markets: the soaring cost of insuring oil shipments from the region since the onset of the Iran conflict. The U.S. government is preparing to offer subsidized insurance, working with third-party providers to cover oil tankers and other vessels. Plans are also underway for possible naval escorts for these ships.

The U.S. International Development Finance Corporation (DFC) announced on March 6 that it will initially focus on providing coverage for cargo, hull, and machinery—including war risk insurance—for maritime shipments in the Persian Gulf. The initiative will prioritize partnerships with American insurers and is being coordinated with both the U.S. Treasury and U.S. Central Command.

“By collaborating with CENTCOM, our coverage will offer unparalleled security,” said DFC CEO Ben Black. “We’re confident this reinsurance plan will keep oil, gasoline, LNG, jet fuel, and fertilizer moving through the Strait of Hormuz and onto global markets.”

Rising Prices and Global Impact

As these disruptions unfold, the U.S. oil benchmark surged past $90 per barrel on Friday—an increase of nearly 60% since the start of the year and approaching highs not seen since the 2022 Ukraine conflict. Fuel prices for gasoline, diesel, and jet fuel are climbing worldwide. In the U.S., the average price for a gallon of regular gasoline has risen more than 60 cents since January, with even sharper effects in Asian and European economies that rely heavily on OPEC oil and Qatari gas.

Tensions escalated further on March 6 after President Donald Trump demanded Iran’s “unconditional surrender,” prompting another spike in oil prices. White House spokeswoman Anna Kelly stated that the U.S. military is ensuring Iran’s situation worsens, with significant damage inflicted on Iran’s navy and missile facilities. She added that President Trump has directed the DFC to provide political risk insurance and financial guarantees for maritime trade, and that the U.S. Navy stands ready to escort tankers if needed.

Exploring Alternative Routes and Risks

Saudi Arabia, the world’s largest oil exporter, has begun diverting some crude shipments through the Red Sea. However, these volumes are small compared to the massive flow that typically passes through the Strait of Hormuz.

According to S&P Global Ratings, 89% of Saudi oil exports transit the strait. For Iran, Kuwait, and Qatar, the figure is 100%, while Iraq sends 97% of its exports through this chokepoint. The UAE has more flexibility, with only 66% of its exports dependent on the strait, thanks to alternative pipelines in Abu Dhabi.

Recent attacks have heightened concerns: on March 5, an Iranian drone struck an oil tanker near Iraq’s Khor al Zubair port, and another vessel reported an explosion off the coast of Kuwait. While large-scale attacks on energy infrastructure have been rare, an Iranian missile hit Bahrain’s sole refinery, and Saudi Arabia’s largest refinery remains offline after sustaining damage.

Molchanov warned that the worst-case scenario would involve Iran deploying mines throughout the strait, which could take months to clear, or a broader campaign targeting energy infrastructure across the region. “Both sides need functioning economies after the conflict,” he said. “But repairing destroyed pipelines, refineries, or export terminals can take months or even over a year, depending on the extent of the damage.”

On the positive side, Molchanov pointed out that the U.S. and other major economies maintain emergency oil reserves to cushion the impact—unlike the 1970s Arab oil embargo, which led to widespread fuel shortages and long lines at gas stations.

However, the risk of natural gas shortages is higher in Asian and European countries that depend on Qatari gas, as most lack significant reserves of their own.

Outlook for Energy Prices

Kathleen Brooks, research director at XTB brokerage, emphasized that energy prices are likely to remain high even if military tensions ease. “We expect energy prices to retain a risk premium as long as Gulf oil and gas infrastructure remains offline, which could take weeks or months to repair,” she wrote. “If the conflict escalates further, markets are likely to continue their downward trend, especially after today’s sharp rise in oil prices.”

This article was originally published on Fortune.com.