Stunning news from the Middle East stirs up new oil shock

Revised Article:

Crisis on the Horizon: Impact of Political Tensions on Energy Markets

The long-predicted crisis on the Middle East energy scene has finally unfolded. Israel launched attacks on the largest global Iranian gas site, South Pars. Iran has hinted at the possibility of shutting down the Strait of Hormuz, a vital shipping corridor that accounts for a third of global oil trading and 20% of the world's liquefied natural gas (LNG) trade. The stage is set for a significant energy market crisis. The withdrawal of Iran from global demand and supply equations, along with skyrocketing freight costs from war-torn regions, could trigger a severe and costly correction.

The scariest shock in the history of the global oil market is once again linked to events around Israel. In October 1973, during the so-called Yom Kippur War between Arab coalition forces and Israel, all Arab OPEC (Organization of the Petroleum Exporting Countries) members imposed an oil embargo on nations supporting Israel and reduced overall production. Oil prices on the world market skyrocketed quadruple-fold within weeks, and the situation never returned to the state of cheap energy of the 1960s and early 1970s. This paved the way for many economists to declare, "The era of cheap oil is over." During the 1970s, Western countries stepped up their energy policies aggressively. There was a significant increase in fuel efficiency for automotive transportation, the emergence of more economical aviation engines, and the creation of the iconic Strategic Petroleum Reserve by the United States, with millions of barrels of oil stored in underground facilities.

But not everything lasts forever. The era of long lines and high oil prices for OPEC nations came to an end in the mid-1980s. The price plummeted, nearly returning to its historical trend, if we consider it in constant terms, by the end of the 1970s. This price slump was devastating for the Soviet Union. A prolonged period of relatively low prices ensued.

In the 2000s, prices again rose, but nothing like the spikes seen in 1973. However, prices far surpassed the records of the 1970s-early 1980s in the 2000s. But in the 2000s, there were two downturns in prices: a short-lived one in 2008-2009 and a more prolonged one from 2014-2020. Russia's financial authorities responded to the first crisis by creating the Stabilization Fund and introducing budget rules, thus curbing the impact of market volatility on the Russian budget.

The imposition of Western sanctions on Russian energy exports in 2022 and the damage to the "Nord Stream 2" gas pipeline removed significant amounts of Russian exports from the Western oil and gas market, comparable to those currently under threat. The result was a surge in oil prices to $120 per barrel, but they quickly returned to their trend. Gas prices in Europe quadrupled and held nearly steady for almost a year, before collapsing back to normal levels.

The United States is almost independent of oil from the Persian Gulf. Since the 1970s, it has mostly shifted its focus from OPEC countries to neighboring Mexico and Canada. The loss of energy exports from the region will primarily affect Asian nations such as China, India, Japan, and others. The potential loss of LNG from the Gulf would be highly sensitive for Europe, but not critically so - they receive the lion's share of LNG from the United States. Furthermore, if creativity allows, they can manipulate the implementation of sanctions against Russia.

The worst-case scenario for energy consumers could be a repetition of the "Arab oil embargo" of 1973 - if Iran is joined by other exporting countries, and the conflict spreads to other Gulf states. This could create a new wave of economic turmoil that has never been seen before. As always, the most dependable and proven risk management tool remains the creation of risk reserves - be it money, fuel, or food, and, for nations, weapons as well.

Insights:

Iran produces about 3.3 million barrels per day (bpd) of oil, with exports fluctuating widely due to sanctions and geopolitical events. It also produces about 34 billion cubic feet per day of natural gas, although all of this gas is consumed domestically.
In 2018, sanctions following the U.S. withdrawal from the nuclear deal caused Iran's oil exports to plummet to near zero in some periods, leading to tight global supply conditions and upward pressure on oil prices.
Recent military attacks have temporarily suspended significant gas production and caused concerns about oil supply security from the region. However, Iran's oil refining infrastructure and storage facilities have largely remained operational, mitigating immediate supply shocks.
Iran has skirted sanctions by employing measures like ship-to-ship transfers and concealing tanker locations, enabling it to sustain oil exports, especially to China. This has resulted in a significant increase in Iran's exports, reaching about 1.8 to 2.33 million bpd in 2025.
The disruptions in Iranian oil and gas exports have consequences for other OPEC members, who often need to operate near full capacity to compensate for Iranian supply gaps, leading to strains on OPEC’s spare production capacity. Furthermore, any easing of sanctions or new nuclear deals could flood the market with unwanted supply, potentially pushing global oil prices down to levels (e.g., $40 per barrel WTI) that could strain Gulf producers and undermine U.S. shale industry profitability.

In the wake of the conflict, the finance ministry will likely need to allocate funds for emergency energy solutions, given the potential impact of war-and-conflicts on the global energy market.
The escalating tensions between various political entities could potentially disrupt the flow of energy resources, thereby increasing the costs of finance and affecting the overall economy.
As the crisis unfolds in the Middle East, there might be a shift in the industry's focus towards alternative energy sources, with general-news outlets emphasizing the urgency of transitioning away from reliance on oil and gas in the face of unstable politics and energy markets.