Opinion
Rethink prompt: Why did the Iran-Israel conflict barely shake oil prices?
Summary
- The West Asian conflict has not disrupted the world’s top three oil consuming markets, and seems unlikely to. While some uncertainty cannot be ruled out, expectations of which way oil prices will move henceforth may need a broad rethink.
When Iran shot off rockets at Israel, analysts across the world waited with bated breath in anticipation of an oil-price spike. Some expected crude oil to cross $100 per barrel within days and hurt a global economy already reeling from supply chain bottlenecks. The ‘First Oil Shock’ of 1973 was recalled, when an Arab oil embargo disrupted Western economies. In this instance, however, oil prices went in the opposite direction. By the first week of May, oil was trading at a 3-month low.
In what turned out to be a benign geo-political event, both oil spot and futures prices assumed normalcy quickly and they again seem range-bound, at least for now. Amid the chaos, what spike-fearing analysts may have overlooked is the state of the global economy and evolution of oil supply chains.
Broad assessments reveal that the world’s three major oil consumers have significantly diversified their supply chains and are less vulnerable than they were back in 1967 or 1973.The world today is a different place.
Consumer countries are not only more technologically advanced, but strategically agile. Taking lessons from the 1973 embargo imposed by Organization of the Petroleum Exporting Countries (Opec), big consumers have succeeded in not only securing their own supplies, but also forging alliances with non-Opec producers. Consider the hydrocarbon strategy of the US, the world’s largest consumer of oil.
With the help of advanced exploration and ‘fracking’ techniques, the US has emerged as the world’s largest oil producer ahead of Saudi Arabia, which controls Opec. The US production capacity is estimated at 22 million barrels a day, above its demand placed at 21 million barrels, but its shale-oil is expensive to extract and it imports over a quarter of its requirement, varying it to 40%, depending on prices.
Since 1973, the US has sought to depend on domestic sources for over half its needs. Opec’s share in its imports has declined significantly over the past 50 years. By my calculations based on data available from the US Energy Information Association, the share of Opec suppliers (excluding Venezuela) in US imports has fallen to 11% today from 29% in 1973, while the share of non-Opec producers like Canada and Mexico has significantly increased.
This was an early instance of supply diversification. Advances in fracking technology, of course, have been a big assurer of US energy security. Such oil is costlier, but its capacity turns profitable above a certain oil-price point and keeps global oil prices in check, as supply can easily increase to ease market shortfalls.
The world’s second biggest oil consumer China is reportedly trying to upgrade and better utilize its refining capacities in the province of Shaanxi even as its builds strategic reserves, a process that started even before the recent bout of Israel-Iran hostility and signals China’s intent to diversify a portion of its oil shipments away from the contested waters of Indian Ocean region as well as the South China Sea.
The Russia-Ukraine war situation helped Russian oil make a decisive case for itself in Beijing, and for an energy-hungry China with close Moscow ties, this works out well. While Russian oil flowing to China via ships from the Russia’s east (Primorski Krai) is currently less than 3% of China’s total daily consumption, this nexus is now expected to strengthen. Like Shaanxi, Chinese refining capacities in the province of Shandong are witnessing upgradation action. Beijing seems resolved to steadily diversify its oil supply chains.
Moreover, a significant investment in oil exploration technology has allowed China to emerge as the world’s fifth largest oil producer, boasting of over 5.2 million barrels as its daily output capacity. China’s gas needs are already almost fully covered by Russian ‘Power of Siberia’ network of gas pipelines.
All these efforts show that Beijing has used geopolitical alliances to work at insulating the Chinese economy from West Asian oil supply shocks. China’s slowing economy is a reason some analysts cite for oil-price moderation. But even if its domestic oil demand returns to a path of fast growth, Chinese policymakers, who have also focused on renewable-power options, can claim to have a strategy in place for energy security.
India, the world’s third largest oil consumer, has been shipping in vast quantities of discounted Russian oil. Thankfully, these shipping lines have been relatively free of geopolitical threats in the Red Sea, perhaps because of a Tehran-Moscow nexus ranged against Western powers that does not seem inclined to trouble a neutral country.
Some oil forecasters expect the extraction-cost advantage of the Middle East to enhance the region’s global market-share once carbon charges come to bear on hydrocarbon producers and fossil fuels start being squeezed by climate-action policies worldwide. Across the Arabian Sea, India has a significant chunk of Asia’s refining capacity, with advanced technology that allows a large part to process almost any type of crude on offer. This, combined with global neutrality, provides us an unparalleled advantage.
The West Asian conflict has not disrupted the world’s top three oil consuming markets, and seems unlikely to, unless something dramatic alters current conditions. Some uncertainty cannot be ruled out, of course, but expectations of which way oil prices will move henceforth may need a broad rethink. As commodity prices impact inflation and other variables, how the world is changing always needs to be kept under watch.
