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The risk of an escalating war between Israel and Iran is testing the global market’s faith that crude oil prices would be insulated from a widening of hostilities across the Middle East.
For decades, conflicts in the oil-rich region frequently spooked oil markets and weighed on the economy. But now, Middle East military skirmishes are causing more shrugs than drastic price spikes — a welcome development for the Biden administration, which has faced political criticism from Republicans over fuel prices and is trying to contain the fallout from Iran’s launch of nearly 200 missiles into Israel on Tuesday.
Increased oil production from the United States, Brazil and other places in the past two decades has diversified the global fuel supply, which means oil markets rely less on Middle East shipments that Tehran could disrupt, energy and security analysts told POLITICO. That’s notwithstanding an upward jolt in oil prices Thursday after President Joe Biden publicly acknowledged that the fighting could spread to Iran’s oil facilities.
“For those of us who spend our lives looking at the effects of a [Middle East] crisis on oil prices, obviously the past 10-plus years have been a complete washout,” said Michael Knights, an analyst at the think tank The Washington Institute for Near East Policy. “No matter how insane the thing is, it has a minimal impact on oil. The market has proven time and time again it can make up shortfalls.”
The next stages of Israel’s conflict with Iran could test the market’s robustness in ways not seen for decades, as Prime Minister Benjamin Netanyahu weighs how to retaliate for Tuesday’s missile attacks — with Iran’s oil fields and nuclear facilities looming as potential targets. The Iranian response to such an attack could conceivably include assaults on targets elsewhere, such as Saudi Arabia’s oil fields, or lead to the closing of a key petroleum shipment choke point in the Persian Gulf.
Asked Thursday morning if he would support an Israeli strike on Iran’s oil facilities, Biden told reporters: “We’re in discussion of that. … And there’s nothing going to happen today.
“We’ll talk about that later,” he added.
So far, oil traders’ response has been muted.
U.S. crude oil futures prices initially jumped more than 5 percent Tuesday morning when warnings about the pending Iranian missile strike filtered into the market — but prices quickly pared those gains after the attack, which saw most of the missiles destroyed before hitting their targets. They jumped again Thursday after Biden’s remarks, eventually climbing past $73 — though that is still well below the levels above $80 where they traded for much of the summer.
Even a massive expansion of the hostilities to Iran’s oil-producing neighbors would probably lift oil to only around $100 a barrel, a price that would push U.S. gasoline prices to anywhere between $3.50 to $4.50 a gallon, experts said. The average U.S. price for regular gasoline was $3.19 a gallon on Thursday, down about 60 cents from a year ago, according to the American Automobile Association.
Oil prices hit a high during the Biden administration near $124 a barrel in March 2022, shortly after Russia invaded Ukraine, pushing gasoline prices to a record of $5.03 a gallon that spring. That spike still serves as a major talking point for former President Donald Trump in his campaign to defeat Vice President Kamala Harris.
But the rise in U.S. oil output to the highest levels of any country in history, and increases in production from South American producers, has eased the market’s reliance on Middle Eastern oil. And more recently, soft Chinese fuel demand has weighed on global prices. Saudi Arabia, the United Arab Emirates, Libya and other oil producers have spare production capacity, which could easily make up any supply shortfalls if an Israeli strike on Iran’s oil fields or export facilities pushed up prices, analysts said.
In addition, the White House has labored since the Russian invasion to protect American consumers from conflicts among oil producers. It constructed sanctions on Russia to exempt oil at certain prices, and over the past year has deployed the U.S. military to deflect attacks by Iranian proxies directed at key oil shipping lanes in the Middle East.
Saudi Arabia is also sanguine about the latest hostilities, and expressed more concern that oil prices could tumble toward $50 a barrel if other members of the OPEC+ oil cartel don’t stop cheating on their agreed-upon production limits, The Wall Street Journal reported on Wednesday.
Oil prices could see a significant increase if Iran instigates a prolonged attack against its rival Saudi Arabia, Knights said. Otherwise, a conflict that is contained to Iran and Israel will be “a big nothingburger when it comes to oil prices.”
The White House and State Department did not respond to questions on whether the U.S. is advising Israel on how it might retaliate against Iran.
Douglas Rediker, a senior fellow for foreign policy, global economy and development at the Brookings Institution, said the Biden administration may try to talk Israel out of targeting Iran’s major oil infrastructure and stick to military targets. The bigger fear is that Iran significantly escalates the conflict to draw other Middle Eastern countries and the United States directly into the fighting, Rediker said.
But even if Iran’s oil production is severely damaged, it would cut supplies by probably less than 2 million barrels per day, analysts said. That’s a relative drop in the bucket in a global market that consumes 100 million barrels daily, Rediker said. The United States or China could make up any supply shortfall with releases from their strategic petroleum reserves, he added.
“If you took that all offline, then the global supply is down 1.75 million barrels a day,” Rediker said. “This is what the SPR is for. Both the U.S. and China have significant strategic petroleum reserves.”
The Biden administration has been using the recent pullback in oil prices to replenish the United States’ Strategic Petroleum Reserve, which it tapped for more than 200 million barrels in 2022 to combat high gasoline prices after Russia’s Ukraine invasion disrupted global markets. The reserve now holds 383 million barrels of oil, 53 percent of its full capacity, which Republicans have alleged has weakened the country’s energy security.
Analysts at the consulting agency ClearView Energy estimated that solely destroying Iran’s oil output would cause the international crude prices to rise to as high as $86 per barrel, a level last seen in June.
Should Iran retaliate to such an attack by closing the Strait of Hormuz at the mouth of the Persian Gulf, which provides a major throughway for Middle Eastern oil exports, those oil prices would increase to as high as $101 a barrel — a worst-case scenario, according to ClearView’s estimate. Such a price could translate to gasoline prices rising past $4 a gallon during the high-demand season, according to fuel price website GasBuddy.com.
But even that scenario might be too worst-case, said Landon Derentz, senior director for global energy security at the Atlantic Council Global Energy Center and a former national security and energy official during the Obama, Trump and Biden administrations.
About 20 percent of global oil supplies moves through the Strait of Hormuz, but enough new delivery options have developed over the years that even closing down that waterway would not dramatically affect flows, Derentz said in an interview. And that’s even assuming Iran would want to close it, he added.
“Their economy is already not doing what they want it to be doing, and closing the strait would not make it do better,” Derentz said. “Even if they did go there, there’s now an alternative for most of those barrels. The analysis that [a closure] would take 20 percent of oil off the market is probably overestimated by a significant factor.”
Many global leaders may still recall the oil shock of the 1970s, when the Saudi-led oil production cartel imposed an embargo on the U.S., resulting in oil prices jumping from $1.80 a barrel to $11.65, the equivalent of a $66 increase in today’s dollars.
But as shown by an attack that Iran launched in 2019 on Saudi Arabia’s crucial oil processing plant at Abqaiq, which caused a brief price spike that quickly subsided, today’s oil market is less beholden to one source of supply, Derentz said.
“The fact that Saudi Arabia was so resilient and quickly brought back energy security in the face of such an aggressive attack a half decade ago has built a risk tolerance into the market that’s higher than it otherwise might have been,” Derentz said.
