How escalation in the Middle East may lead to turmoil in oil markets

Posted by | Rauf Mammadov

Oil is a geopolitical commodity usually sensitive to major geopolitical or military developments, especially  in the Middle East. Yet, the most recent escalation in the Middle East did not have a significant impact on oil prices. Prices did increase in the aftermath of the Hamas attack, but they went on to slowly continue their downward trend, with gasoline prices in the U.S. even falling below US$3.50 per gallon for the first time since February of this year.

One of the main reasons the escalation did not impact oil prices is the reserved response by oil-producing Gulf states to the ongoing developments. So far, the discontent of Saudi Arabia, Bahrain, Kuwait, and the UAE is limited to statements rather than actions, a stark contrast to similar events that took place 50 years ago. In 1973, the Saudi-led Arab states imposed an oil embargo on the U.S. and western countries which supported Israel during the Yom Kippur war, leading to dire economic consequences for the global economy, and creating supply shortages in a U.S. dependent on Saudi oil.The U.S. is no longer dependent on oil supplies, but the potential for further conflict escalation could still disrupt global oil markets, as has been seen in the past.

The Middle East is home to some of the world’s most crucial oil transit chokepoints, such as the Straits of Hormuz and Bab Al Mandab, which account for more than 30% of global oil transportation. An attack on Saudi Arabia’s and other key producers’ critical oil-producing and transport infrastructure may also cause volatility in the oil market.

Any potential involvement of Iran, another major oil producer, in the conflict also poses a serious threat to the oil market, due to the possibility of it leading to a western embargo of Iranian oil as a response.

The risks remain. The level of escalation will dictate the impact on oil prices.

Tags: Energy