A pump jack at sunrise near Bakersfield, Cali., on Oct. 14, 2014.Lucy Nicholson/Reuters
Drivers and investors alike may have realized that the world is not in the grip of an oil price shock. Which is strange, considering war is raging in the Middle East, while Russia’s invasion of Ukraine is well into its third year.
Historically, conflicts involving major oil producing nations have been a surefire way to send crude prices soaring, from the Iranian revolution in 1979 to Iraq’s invasion of Kuwait in 1990.
But energy markets today remain clearly un-shocked. West Texas Intermediate trades around US$70 a barrel, while the average retail price of a litre of gasoline in Canada is around $1.47, according to GasBuddy, which tracks real-time prices at the pump.
The question is: why? Not that anyone is complaining, except for the oil companies. Certainly not Canadian drivers, who had to endure gas prices as high as $2.10 per litre in the aftermath of the Russia-Ukraine conflict.
While the global oil market has many facets, the commodity’s newfound steadiness can be partly explained by the changing geopolitics of oil.
The U.S. is now the world’s biggest oil producer, having overtaken Saudi Arabia and Russia, which has made the commodity less vulnerable to turmoil in the Middle East.
Additionally, China’s economic weaknesses are helping to curb global demand for oil. The shift to electric vehicles is also a factor in eroding demand.
In fact, there may be a global oil over-supply shaping up. A new World Bank report forecasts that production will outpace global demand by an average of 1.2 million barrels per day next year.
A gap that large – which has only been surpassed during the pandemic-related shutdowns in 2020 and the 1998 oil-price collapse – is “likely to limit the price effects even of a wider conflict in the Middle East,” the World Bank said in the report published Tuesday.
According to conventional thinking, the risk to energy markets from the conflict hinges on Iran’s involvement.
Iran is the world’s seventh-largest oil producing nation. A disruption to its oil capacity is generally seen as a potential catalyst for an oil price shock.
In the past month, Israel and Iran have traded attacks, bringing the region to the brink of a broader war.
In the past, this may have been enough to send crude prices hurtling toward US$100 a barrel and beyond.
But Iranian oil isn’t as important as it once was. That’s because the U.S. has flooded the market with oil extracted from once-inaccessible shale deposits. Hydraulic fracturing has turned the U.S. in the reigning global energy superpower.
Last year was the sixth straight year in which the U.S. produced more crude oil than any nation in history. And Donald Trump, should he win the presidency once again next week, has vowed to “dramatically” increase energy production even further.
The U.S. shale boom largely gave rise to a global oil glut that emerged in 2014, sending U.S. crude prices from more than US$100 a barrel down to a low of US$26 within a year and a half.
It wasn’t until Russia invaded Ukraine in early 2022 that WTI revisited the US$100-a-barrel mark.
Largely because of the U.S., the world can produce much more oil than it needs. This fact has compelled the Organization of the Petroleum Exporting Countries and its allies to hold back on production to keep prices from falling too low for their liking.
At the same time as the U.S. has transformed the global supply of oil, China has effected major change on the demand side. An historic slowdown, exacerbated by a housing crisis, has seen Chinese oil demand flatline since last year, according to the World Bank.
And yet, the oil market could have a few tricks up its sleeve, said Al Salazar, an analyst at Enverus Intelligence Research. That’s because low oil prices hinge on two highly “nebulous” forces: “Chinese demand, because the data is wonky, and OPEC behaviour, which is erratic,” Mr. Salazar said.
For now, the oil market is quiet. But it’s an uneasy equilibrium.