Oil is the most political of all commodities, unless you’re French, then it’s wine. Or Japanese, and then it’s rice. Or Iowan, and it’s corn. Or…, well you get the message.
But the reality is that politics affects oil prices much more than other commodities because: a) oil supply is concentrated in a few countries; b) its importance makes it a target of attacks, political and/or violent; and c) the stuff burns and/or blows up. If you are a Colombian guerrilla, attacking an oil pipeline is much more satisfying than blowing up a truckload of flowers (one of the country’s other major exports). If you are a Houthi rebel, a drone attack on the Saudi oil fields is likely to have a much bigger impact than an attack on, well anywhere else in that country.
Between the war in Ukraine and the Israeli/Hamas battle, the potential for a disruption of oil supplies seems higher than at any time in the past decade, at least since the Arab Spring in 2011. However, ways in which oil supply (and thus prices) might be affected vary in terms of both probability and impact.
The most serious threat is of a military attack on oil supplies on the Arabian Peninsula or the Straits of Hormuz, both of which have happened in recent memory. An attack on the Saudi oil fields has long worried energy security analysts, given the huge concentration of production facilities and the proximity to hostile actors, most notably the Houthis in Yemen and the Islamic Republic of Iran. The recent Saudi-Iranian rapprochement would seem to have reduced the likelihood of such an attack, and past attacks, such as in 2019, accomplished little. Possibly a much larger attack, such as the missile barrage Hamas launched on Israel, would have more success but only Iran appears capable of such and it would constitute an overt act of war. This seems very unlikely.
Attempts to disrupt shipping through the Straits of Hormuz seem more likely, partly because they would be less damaging but also might be done covertly. Seizure of tankers, as has happened a couple of times recently, if done on a broader scale would provoke a quick military response, making such a tactic unlikely. And placing mines in the Straits could be done, but current surveillance technology makes this hard to do covertly. At the least, a few tankers might be affected; the likelihood of a military response would probably deter major attacks.
Still, anything making sailing in the Gulf more dangerous would have a mild impact on the oil market. It could mean a pause or reduction in exports, as some tanker owners and their insurers avoid the area, even if only briefly. But in response first, insurance rates would rise and second, smaller shipping companies would step in where larger, more conservative companies fear to tread. The result would be a slight increase in oil prices, a few dollars a barrel, or a brief dip in exports which would be quickly made up.
(Historical note: the highest shipping insurance rates in ‘modern’ times appears to have occurred during the American Revolution, when the depredations of privateers saw rates for British vessels soar to 30-50% of the value of their cargo, but this was apparently short-lived and they generally only increased by a few percent of the cargoes. See Eric Jay Dolin’s Rebels at Sea.)
The ongoing Israeli operations in the Gaza Strip have increased anger against that government and its supporters in many parts of the world, most notably in Islamic nations. Could oil exporting governments respond to public pressure by cutting production, as in 1967 and 1973? Maybe, but the experience of 1973 taught us that using oil as a political weapon backfired in the long term. It made participating countries’ oil less attractive and led to Middle East producers being treated as ‘residual’ suppliers, that is, turned to only after all other producers had sold out. Numerous oil nations’ leaders since have sworn off the use of oil as a weapon with only rare exceptions when a particular leader—Iraq’s Saddam Hussein and Libya’s Muammar Qaddafi—called for exporters to reduce production for political reasons. Their calls were ignored and they themselves did little or nothing.
Of course, many of the leaders of oil exporting nations might be only passingly familiar with the oil market developments of the 1970s and 1980s and think to reduce production in support of Palestinians. That is quite possible: , politicians (well, everyone) often fail to learn from the past. To date, there appears no evidence that any countries are considering such a move, but it would certainly raise prices and must occupy at least a small portion of oil traders’ attention spans.
A more likely development would be for some oil producers to take a harder line against raising production at coming OPEC+ meetings. The current consensus seems to be that prices in the $80s are adequate and will be supported. A spike in prices, whether due to geopolitical tensions or market forces, could be less likely to bring forth a production increase in this instance. The Saudis recently made voluntary cuts and extended them through year’s end; potentially, unhappiness with the Middle East situation will make them more inclined to adopt a hawkish stance, extending the cuts next year even if markets appear to be tightening.
Finally for the bulls, sanctions against Iran and Venezuela have been relaxed recently, especially for the latter. (Iran has appeared to evade them, raising production in recent months, but it’s not clear if that reflects less enforcement from Washington or not.) Given the current political climate, the likelihood that the U.S. will try to impede Iranian exports more strictly could take half a million barrels a day off the world market. The Maduro regime in Venezuela, having moved to appease Washington, now appears to be backtracking on its promise to allow fair, or at least fair-ish, elections. The oil market hasn’t priced in the higher Venezuelan production that relaxed sanctions would allow, partly because they would be minimal, but that might change at any time.
There are also geopolitical events that could bring prices down, a little or a lot, depending on timing and extent. An end to the war in Ukraine would have little physical impact on world energy markets but would remove one very big psychological prop to oil prices. Reports of Vladimir Putin’s ill-health might be exaggerated or fallacious, but no one lives forever, and he wouldn’t be the first leader ousted over a military misadventure. One presumes he is avoiding windows.
Relaxed sanctions on Iran appear almost impossible in the current political environment, but Venezuelan sanctions have been lately eased and should mean slightly increased supply from there, assuming no missteps from the Maduro regime, or at least no more missteps. And while the Saudi government might be less willing to ‘assist’ the West with lower oil prices now, they might want to hurt the Iranian regime by just that. A harder line against Iran by the Biden Administration could offset its strong pro-Israeli stance in Saudi eyes and it would be easy for Saudi Arabia to sit back and let their voluntary production cuts expire, causing a price dip.
Finally, while further terrorist attacks related to the Middle East situation have been so far few in number and minor in impact, the potential for lone wolf attacks remains heightened. In the past, violence against crowds in shopping areas has not produced much economic effect but a series of mass shootings at shopping malls could certainly dent the holiday spirit and reduce consumer spending. Or, conversely, boost on-line shopping. The point remains, though, that political violence and geopolitical tensions are rarely bullish for the global economy, which already appears leaning towards weakness if not outright recession. And while that would probably mean more OPEC+ cuts to balance the market, it is more likely bearish for oil prices.
Volatility and uncertainty are the handmaidens to the oil market, and the current levels, while well below those in 1979, are enough to keep the Valium flowing in Houston, Singapore and many other oil centers. Still, it can be hoped that when we emerge from the current situation market stability will increase and oil will once again be more of a commercial than political economy. Wishful thinking, but recall the lengthy period from 1986 to 2000 when the oil business was all about business.