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

The recently increasing tension in West Asia has once again raised concerns that this situation will affect global oil prices, considering the importance of the region in global oil and natural gas supply. of israel terrible destruction Gaza The genocide of the Palestinian people and even the attacks on Lebanon over the past year have had little impact on oil markets because neither Palestine nor Lebanon are major oil producers. But Iran is another matter. There is a real situation at play now that Israel has made it clear that its stance of aggression with impunity extends to Iran, even to the point of trying to force “regime change” along the lines developed by its ardent supporter, the United States, in previous West Asian wars. the potential for a serious regional or even global war to break out.

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However, it is noteworthy that international oil markets did not give the expected reaction. It is true that global oil prices rose in October, rising 10 percent in the week to October 7 to average over $80 per barrel, but then fell and remained around $77 per barrel until the third week of October.

After more than a decade of relative stability in the 1990s and the first half of the 2000s, volatility in global oil prices increased from the period of the first US Gulf War against Iraq in 2003 and rose sharply until mid-2007. However, there will be a sharp decline 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 steady trend with sharp ups and downs. Moreover, they had relatively little to do with geopolitical events and much more to do with economic processes.

Supply-demand dynamics

Fundamentally, the nature of the global oil market has changed in terms of both supply and demand. Oil supply is more diversified to the point that it is dominated by OPEC+ oil producers (the Organization of Petroleum Exporting Countries, mostly West Asian countries such as Saudi Arabia, Kuwait and the UAE, and other related oil-exporting countries such as Russia and Kazakhstan). The market is no longer as important as it was in the 1970s and 1980s. The United States, long the largest consumer of oil, became the world’s largest oil producer in 2022, now accounting for about 22 percent of global production. This is slightly more than the next two largest producers (Saudi Arabia and Russia) combined. Meanwhile, despite its significant known oil reserves, Iran accounts for only 4 percent of global production; This rate is less than 5 percent of China’s.

The United States is also among the top five oil exporters, along with Saudi Arabia, Russia, Canada and Iraq, and dominates natural gas exports. Iran is only the 16th largest oil exporter by volume, exporting less than 4 percent of world oil exports. Thus, even the worst-case scenarios currently 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 a limited impact on globally traded oil resources.

Alternative energy sources

The demand side is also important. Over the past decade, China has become a voracious importer of oil, surpassing the United States in 2017. China’s imports of oil and products have increased steadily for two decades, peaking in 2023, and have certainly been a factor in the rise in oil prices since 2016. except for the decline during the pandemic period. But such oil imports have slowed and even decreased so far in 2024; This reflects China’s domestic economic slowdown and rebalancing towards other forms of raw energy use (including coal).

As a result, the International Energy Agency (IEA) predicts that global demand is slowing and will be significantly less this year than in 2023, even if there are “strong gains” in oil supplies from non-OPEC+ countries. United States, Brazil, Guyana and Canada. Meanwhile, spare capacity to produce oil in OPEC+ countries is at a historic high, lower only than during the exceptional period of the COVID-19 pandemic. Moreover, although there has been some decrease in oil stocks in the last four months, global crude oil and refined product stocks are at their highest levels in the last few years. As the IEA report puts it, “For now, supply continues to flow and barring major disruption, the market will face a sizeable surplus in the new year.” (https://www.iea.org/reports/oil-market-report-october-2024)

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Of course, new shocks could still emerge from this highly tense and potentially explosive situation, and these could dramatically change these forecasts, making global capitalism complacent about the possible consequences. Moreover, most of the recent increases in oil prices (just like the prices of other commodities, including food) have resulted not from actual supply-demand imbalances, but rather from profiteering by large global corporations in these sectors and financial speculation in the energy field. and commodity markets. These are often activated and then fueled by media reports rather than actual changes in physical markets, and this can still happen.

However, for now, the tragedy and unspeakable horror in Palestine and Lebanon is not an issue important enough for the markets to consider. Because its impact on global energy supply is still limited.

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