An oil tanker is on fire in the sea of Oman on June 13, 2019. Since Israel has made it clear that its aggression extends to Iran, there is real potential for a serious regional and even global war.
| Photo Credit: AP

The recent escalation of tensions in West Asia has led once again to concerns that this will affect global oil prices, given the region’s importance in global petroleum and natural gas supply. Israel’s horrific devastation of Gaza over the past year and its genocide upon the Palestinian people, and even the attacks on Lebanon did not have much impact on oil markets because neither Palestine nor Lebanon are significant oil producers. But Iran is another matter. Since Israel has now made it clear that its attitude of aggression with impunity covers Iran as well, even to the point of trying to force “regime change” along the lines developed in previous West Asian wars by its fervent supporter the US, there is real potential for the outbreak of a serious regional and even global war.

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Remarkably, however, international oil markets have not reacted as much as expected. It is true that global oil prices increased in October, rising by 10 per cent in the week to October 7 to an average of above $80 a barrel, but they fell thereafter, staying at around $77 a barrel into the third week of October.

After more than a decade of relative stability in the 1990s and first part of the 2000s, global oil price volatility increased from around the time of the first Gulf War that the US waged against Iraq in 2003, and went up sharply until mid-2007, only to fall drastically in the second half of the year. The figure shows how global oil prices have fluctuated dramatically since then. It is true that current oil prices are much higher in nominal dollar terms than they were two decades ago, but since 2007 they have fluctuated around a constant trend, with sharp peaks and troughs. Also, these have had relatively little to do with geopolitical events and much more to do with economic processes.

Supply-demand dynamics

Essentially, the nature of the global oil market has changed, in terms of both supply and demand. Oil supply is more diversified, to the point where OPEC+ oil producers (the Organization of Petroleum-Exporting Countries, mostly West Asian states like Saudi Arabia, Kuwait, and UAE along with other associated oil-exporting countries like Russia and Kazakhstan) that dominated the market in the 1970s and 1980s are no longer as significant. The US, which has been the largest oil consumer for a long time, became the world’s largest oil producer in 2022 and now accounts for around 22 per cent of global output. This is slightly more than the two next largest producers—Saudi Arabia and Russia—taken together. Meanwhile, despite its significant known oil reserves, Iran provides only 4 per cent of global production, less than China at 5 per cent.

The US is also among the five largest oil exporters (along with Saudi Arabia, Russia, Canada, and Iraq) and is dominant in natural gas exports. Iran is only the 16th largest oil exporter in volume terms, exporting less than 4 per cent of world oil exports. So even the worst-case scenarios currently being considered, such as an Israeli attack on Iran’s oil refineries or a blockade of the Strait of Hormuz through which most of Iran’s oil flows, would have only limited impact on globally traded oil supplies.

Alternative energy sources

The demand side also matters. In the past decade, China emerged as a voracious importer of oil, surpassing the US in 2017. China’s imports of petroleum and its products increased continuously for two decades, peaking in 2023, and were certainly a factor in the oil price increases since 2016, other than the pandemic-period decline. But such oil imports have slowed down and even declined thus far in 2024, reflecting China’s domestic economic slowdown and rebalancing towards other forms of crude energy use (including coal).

As a result, the International Energy Agency (IEA) estimates that world demand is slowing down and will be significantly less this year than in 2023, even as there will be “robust gains” in oil supply from non-OPEC+ countries, led by the United States, Brazil, Guyana and Canada. Meanwhile, the spare capacity to produce oil in OPEC+ countries is at a historic high, lower only than the exceptional period of the COVID-19 pandemic. Further, despite some drawing down of oil inventories over the past four months, global stocks of crude oil and refined products together are the highest of the past few years. As the IEA report says, “For now, supply keeps flowing, and in the absence of a major disruption, the market is faced with a sizeable surplus in the new year.” (https://www.iea.org/reports/oil-market-report-october-2024)

Also Read | Lebanon under siege: Bombed but not broken

Of course, there could still be new shocks coming out of this highly tense and potentially explosive situation, which could dramatically alter these projections that are making global capitalism complacent about likely outcomes. Also, many of the recent spikes in oil prices (just as those in other commodity prices including food) have not resulted from actual supply-demand imbalances, but rather were the result of profiteering by big global corporations in those sectors and financial speculation in energy and commodity markets. These tend to be enabled and then fuelled by media reports rather than real changes in physical markets, and this also could still happen.

But for the moment, the ongoing tragedy and unspeakable horror faced by people in Palestine and Lebanon is not a subject important enough for the markets to take note, because the impact on global energy supplies is still limited.

Jayati Ghosh taught economics at Jawaharlal Nehru University, New Delhi for nearly 35 years, and since January 2021, she has been Professor of Economics at the University of Massachusetts Amherst, US. She has authored and/or edited 20 books and more than 200 scholarly articles.