SHOCK HORROR: HOW HIGH COULD THE OIL PRICE GO? / THE ECONOMIST

 Shock horror

How high could the oil price go?

Geopolitical risk is rising. But so is the supply of oil

All around the world consumers, motorists and politicians are nervously eyeing the oil price. 

The conflict between Israel and Hamas that began a year ago is spreading. 

If all-out war erupts between Israel and Iran, the threat to the Middle East, a region that produces a third of the world’s crude, is as obvious as it is scary. 

Few commodities affect the global economy as much as oil does. 

And, as America’s presidential candidates are keenly aware, few are as likely to sway an election. 

The past two years of inflation have shown just how much voters hate sticker shock.

The price of oil rose by 10% in a week, as Israel attacked Hizbullah, a Lebanese militia backed by Iran, and Iran retaliated with around 200 missiles fired directly at Israel. 

On October 7th it reached $81 a barrel, before falling. 

Two and a half years ago Russia’s invasion of Ukraine sent oil prices surging beyond $120, as the West imposed sanctions on Russia and fears intensified of disruptions to the supply from the world’s second-biggest exporter. 

What could happen this time? 

If the fighting gets worse, a serious oil shock is possible. 

But a glut of supply means the oil market is less vulnerable to such a shock than it was in 2022.

As we published this, Israel had yet to retaliate against Iran. 

On October 3rd Joe Biden, America’s president, jolted the market when he hinted that Iran’s oil infrastructure might be in Israel’s cross-hairs. 

However, that is only one of many possible targets. 

And even if Iran’s oil output were disrupted, it is not as big a producer as Russia. 

It exports nearly 2m barrels per day (bpd), about 2% of the global supply. 

By comparison, Russia exports nearly 5m bpd.

The global picture, too, is markedly different from 2022. 

When Russia invaded Ukraine oil was in short supply and demand was roaring back, as the world’s economies came out of covid lockdowns. 

The market was ripe for an upset. 

Today the world is swimming in oil. 

The Organisation of the Petroleum Exporting Countries (OPEC) and its allies, spearheaded by Saudi Arabia, had sought to keep prices high by pumping less. 

But that plan has failed, fuelling indiscipline and cheating by other members. 

Now it is being abandoned, with the cartel promising to increase output in December.

Even Saudi Arabia, which is desperate for higher prices to finance its gaudy spending plans at home, is throwing in the towel. 

It has reportedly dropped its price “target” of $100 a barrel, so that it can at least shore up its market share. 

OPEC and its allies have spare capacity of more than 5m bpd; Saudi Arabia alone could ramp up production by 3m.

Opec’s squabbles mask a more fundamental shift. 

Nearly 60% of the world’s oil now comes from countries other than the cartel and its allies, up from 44% in 2019. 

America’s shalemen have become the biggest producers in the world by far. 

Brazil, Canada and Guyana have all increased their output in recent years. 

According to the International Energy Agency, production by non-OPEC countries will grow by 1.5m bpd next year.

At the same time, demand for oil has been tepid. 

After their post-pandemic bounce-back, the economies of America and Europe are slowing down as past interest-rate increases start to bite. 

China’s economy is struggling under the weight of its property slump. 

On October 8th America’s Energy Information Administration revised down its forecast for global oil demand in 2025 as a result of weakening manufacturing activity around the world. 

Before the latest escalation in the Middle East, oil traders had expected a glut in 2025 as a consequence of weakening demand growth and expanding supply, pushing prices below $70 a barrel.

Today’s ample supply provides a shield against geopolitical shocks, but not an impregnable one. 

If Israel were to hit Iran’s own oil infrastructure, Iran could attack oil producers that have signed economic accords with Israel, such as Bahrain or the United Arab Emirates. 

Or it could block the Strait of Hormuz, through which much of the Gulf’s oil travels. 

That might push the oil price close to its highs of 2022.

Iran’s theocratic rulers would be foolish to take such actions, which could draw America into the conflict and infuriate Iran’s few remaining friends, such as China, the world’s biggest oil importer. 

But in the Middle East, nightmare scenarios can never quite be ruled out. 

Because oil production is still concentrated in a handful of countries, the supply remains vulnerable to the reckless decisions of a few autocrats. 

Thanks to rising global production and weakening demand, however, the market is better cushioned than it has been before.