Middle East Conflict: Why Oil is No Longer a Geopolitical Weapon

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Global Oil Market Stability Amid Middle Eastern Tensions

The global oil market, historically prone to significant fluctuations due to geopolitical conflicts, has shown surprising stability despite rising tensions in the Middle East.
Typically, one would expect a crisis triggered by missile attacks in Israel or potential direct interventions from Iran to result in an immediate spike in crude oil prices.
Remarkably, this has not occurred, with Brent crude remaining close to three-year lows, far below the peaks reached in recent times.

To understand this apparent calm, we can draw a parallel to July 1914 when, despite the assassination in Sarajevo and escalating tensions, the markets remained surprisingly tranquil.
Only with Austria’s ultimatum to Serbia did a chain reaction unfold.
Similarly, today’s markets may not yet fully grasp the serious implications of the current Middle Eastern crisis.

Influence of New Oil Supply

An unexpected aspect is that days after the assassination of Hezbollah’s leadership by Israel, which ignited a fierce response from the Iranian Revolutionary Guards, oil prices remained stable.
The most immediate explanation for this unexpected stability lies in the growth of global oil supply, driven by new producers like Canada, Guyana, Brazil, and especially the United States, thanks to fracking technology.

These nations are flooding the market with oil that exceeds demand, which has been dampened by a global manufacturing recession and an ongoing energy transition in economies such as China, where internal combustion vehicles account for less than half of new sales.

OPEC’s Strategy and Challenges

Moreover, OPEC and Russia, together withholding around 3 million barrels per day (b/d) to support prices, have seen their strategy falter.
The Saudi strategy aiming for $100 per barrel to fund Mohammed bin Salman’s ambitions has struggled against an increasing supply from non-OPEC producers, forcing Saudi Arabia to consider increasing production by December.
Rumors suggest that Saudi Arabia may even opt to open the floodgates and inundate the market—a move that has historically devastated prices.

Iran’s Diminishing Deterrent Power

A critical factor in explaining this newfound stability in the oil market is Iran’s weakened ability to use energy as a deterrent weapon.
In the past, Tehran threatened to block the Strait of Hormuz, through which about one-fifth of the world’s oil passes, if its oil facilities were attacked.
However, this strategy appears less credible now, primarily because an interruption in oil supply would heavily impact China, the main crude oil importer and a potential ally of Iran.

Indeed, China continues to support Iran through a black market for tankers, allowing Tehran to circumvent Western sanctions.
Chinese refineries, especially smaller and less regulated ones, absorb almost 90% of sanctioned Iranian oil, thereby financing Iran’s economy and bolstering allied groups in the region, from Hamas to Hezbollah.
Iranian oil production has doubled since 2019, with exports reaching 2 million b/d.

Shifts in Energy Dependence

The United States, meanwhile, no longer critically depends on Middle Eastern oil, having achieved energy independence through domestic resource exploitation.
U.S.
oil production hit a record 13.3 million b/d, and it is expected to reach 14 million next year.
This shift has reoriented global energy dependence towards China, which is now more vulnerable to potential oil supply crises.

Nevertheless, a significant disruption in oil supplies would still have repercussions for the U.S., economically and politically.
The Democratic Party, in particular, fears a renewed spike in fuel prices ahead of elections, given the importance of gas prices to American voters.
While current gasoline prices have fallen from post-pandemic peaks, they remain elevated compared to pre-2020 levels.

The Strategic Petroleum Reserve and Future Implications

A delicate aspect of U.S.
energy policy is managing the Strategic Petroleum Reserve (SPR), which has been drastically reduced by the Biden administration to counter rising prices post-Russian invasion of Ukraine.
This reduction has sparked criticism, leaving the country less protected against future emergencies.

Although the Middle Eastern crisis has yet to significantly impact global energy markets, it could trigger unpredictable developments.
China’s vulnerability, the growing energy independence of the U.S., and Iran’s ambivalent role as a sanctioned oil supplier create a new geopolitical balance.
This new landscape could lead to substantial changes in international relations and economic scenarios, with oil, while remaining central, potentially losing its status as a geopolitical weapon.

The focus now shifts to how global players, particularly the U.S., China, and Iran, will manage the escalating tensions in the Middle East and the implications for the future of the global energy market.

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