Carole Nakhle, CEO of Crystol Energy. (Credit: Carole Nakhle)
BEIRUT – Amid rising geopolitical tensions across the Middle East following the twin killings of Hezbollah’s Fouad Shukur and Hamas political leader Ismail Haniyeh by Israel last week, the prices of West Texas Intermediate (WTI) crude oil fell slightly last week, from a closing price of $75.30 on July 30, to a closing price of $73.26 per barrel on August 6 (with a peak of $78.52 the day after the attack), while Brent crude oil, the benchmark index in Europe, fluctuated between $78.55 and $76.59 a barrel over the same period (with a peak of $81.46 the day after the attack).
Carole Nakhle, CEO of UK-based energy consultancy firm Crystol Energy, explains to L’Orient Today why oil markets and prices have remained relatively unscathed despite the recent escalations which have pushed the region to the brink of a larger war.
Why have oil prices remained relatively stable despite the growing tension in the region?
The main picture that is stuck in most people’s memory is one that equates instability in the Middle East – the biggest oil-producing region – with spikes in prices, and that was indeed the case for decades.
Today, instabilities are not only contained in the Middle East where Israel has been waging a war on Gaza since October, Houthis waging attacks on ships in the Red Sea in support of Palestinians, and Iran and Israel trading direct attacks, we also have an ongoing war in Europe involving the world’s third largest oil producer, Russia (behind the U.S. and Saudi Arabia, respectively). Other major players in the market – like Iran and Venezuela (which sits on top of the world’s largest proven oil reserves) – are also not producing at capacity. Add to that the significant production cuts of OPEC+ (an organization that includes 13 members of the Organization of the Petroleum Exporting Countries, and allies or namely big producers like Russia). Fifteen years ago, this plethora of geopolitical crises would have sent oil prices skyrocketing, but market conditions are quite different today.
In the last few years, global oil markets have entered a new chapter, one where the above connection has weakened significantly. The Shale Revolution – or the combination of hydraulic fracturing and horizontal drilling that allowed the US to increase its production of oil and natural gas exponentially after 2008 – subsequently becoming less dependent on the Middle East – has also brought a new source of significant supply that is much quicker to reach the market than conventional oil. Additional supplies have also found their way from players other than OPEC+ members, such as Guyana, Canada, and Brazil.
Meanwhile, demand for oil is not growing as fast as it used to, namely due to the structural and economic problems that have hit the world’s largest oil importer, China, as well as ongoing economic challenges in other major economies.
How different is the situation today compared to 1973 when the first oil shock happened?
The situation is very different today. In October 1973, Arab oil producers stopped their oil exports to a group of countries, led by the US, which supported Israel during the Yom Kippur war with Egypt. Combined with a series of production cuts, the embargo caused oil prices to nearly quadruple within a few months. Prices remained high even when the embargo was lifted, causing major economic pain. Global energy and economic crises ensued. Back then, the Middle East and OPEC were key players – OPEC produced half of the world’s oil, a share that has fallen today to around 36 percent. And while oil accounted for nearly half of the world's primary energy consumption at the time, the oil share in the global primary energy mix also dropped to around 30 percent, and oil intensity – or the volume of oil consumed per unit of gross domestic product (GDP) – also declined by nearly 60 percent. All these factors not only showed an improvement in oil efficiency but also a decline in the overall importance of oil in society.
And today, major oil consumers hold oil stocks as a part of a contingency plan in case of significant supply disruptions. Those stocks can be released to the market to dampen the impact on prices and protect local economies, unlike the reality in the 70s.
What could lead oil prices to spike today?
What could cause prices to soar today would be significant and more lasting oil supply disruptions. It is always a scenario we contemplate especially given the ongoing geopolitical instability, but several forces have to converge to create a longer-lasting shock than temporary spikes.