For decades, oil prices could swing wildly on even the distant prospect of war in the Middle East. With U.S. shale, that changed, leading many to assume that anything short of an oil blockade in the Strait of Hormuz will leave oil markets cold—and such a blockade is highly unlikely. This, however, is a false sense of security. Geopolitics can still flip the script on oil bears.
The most recent oil price rally was prompted by the threat of a military escalation between the United States and Iran. Interestingly, the oil blockade that the United States imposed on Venezuela earlier this year failed to really move benchmarks in any consistent way. A war with Iran, on the other hand, has pushed Brent crude past $67 per barrel and WTI to over $62.
Rystad Energy recently published five possible scenarios about U.S.-Iranian relations, with the best-case one involving productive talks leading to a new nuclear deal that the U.S. would force on Tehran, per the consultancy, and that would lead to an increase in Iran’s oil production. This is obviously a bearish scenario – but the other four are increasingly bullish. They range from limited U.S. strikes on Iranian nuclear facilities and possibly oil infrastructure to wide-ranging strikes, the death of the country’s Supreme Leader, and civil unrest ensuing after the collapse of the government.
Interestingly, Rystad Energy does not see a huge price increase potential for crude oil in any of its scenarios. In the worst-case ones, the consultancy sees oil jumping by $10 to $15 per barrel as Iran’s production suffers from the aftermath of adverse events. Some, however, note that if the war spreads across the Middle East, prices could top $100.
A Bloomberg article looked at such a scenario recently, with the authors noting that the price shock would be the result of Iran closing the Strait of Hormuz, albeit for a brief period. Even though brief, such a disruption would affect 20% of global oil supply, the authors noted, leading to a potential price jump of as much as 80%, based on historical data. Still, the effect on oil prices from this worst-case scenario would be limited—because the world, at least according to the authors, does not need as much oil as it did decades ago.
The reason for this is energy efficiency, with the authors pointing out that “In the US, the amount of oil needed to produce one unit of GDP has fallen by about a quarter since 2011.” However, on a global scale, crude oil remains the top primary energy source, which means a price shock would cause pain—although not as much pain as it might have caused 20 years ago, for instance, thanks to inflation. “Inflation means $100 oil today buys fewer goods and services than $100 oil a decade or two ago,” Dina Esfandiary and Ziad Daoud wrote. This is hardly any consolation for those who, with Brent at over $100, would be able to afford even fewer goods and services.
