Oil Prices Between Geopolitical Conflicts and Economic Factors
Oil prices are characterized by rapid fluctuations in step with economic developments and geopolitical conflicts; as these intensify, market demand accelerates and prices rise in anticipation of any potential negative development, before both return to stability in readiness for a new phase of volatility and fluctuations that is seldom long in coming. Historical experience shows that oil constitutes one of the foremost causes of political and military conflicts on the international stage, while at the same time being acutely sensitive to such conflicts, which translate into higher prices.
The first oil market shocks and price fluctuations came after the Arab oil embargo in 1973 of the last century against Western countries, notably the United States of America, in response to those countries' support for Israel against the Arab states in the October War. This caused the price of a barrel of oil to surge, jumping from $2.32 to $11, even though the embargo lasted for a limited period. That event marked the beginning of the volatility and fluctuation in the price of a barrel of oil throughout the last century and up to the present day.
In the new millennium, global oil markets remained vulnerable to fluctuations and shocks. The events of September 11, 2001, in the United States of America caused a sharp drop in average oil prices, which stood at $23.1 a barrel after having reached $27.6 in 2000, and this decline continued during 2002, when the average price of a barrel stood at $18.2. Conversely, the price of oil resumed a steady rise until 2008, with the average price of a barrel reaching 94 US dollars, whereas in 2009 the average price of a barrel fell to $61.
Driven by geopolitical tensions in the Middle East, oil prices resumed their rise starting in 2010, with the average price of a barrel reaching $106 in 2013. It then fell back in 2014 to around $40, and the price of a barrel of oil continued along this trajectory until 2016, recording less than $27, thereby hitting its lowest level in thirteen years. In 2017 and 2018, however, the price of a barrel of oil rose again to reach $52.5 and $69.8 respectively, whereas in 2019 the price trended downward, retreating to $64 a barrel as a result of a slowdown in global economic activity.
At the beginning of 2020, global demand for oil and gas collapsed to its lowest levels, leading to an unprecedented drop in prices due to the disruption caused by the outbreak of the novel coronavirus pandemic (COVID-19) and the resulting shutdown of economic sectors. The average price of the OPEC basket stood at $41.50 a barrel, a decrease of around $22.5 a barrel, or 35%, compared with the price of a barrel in 2019. With the start of 2021, oil prices regained their upward trajectory, recording an average price of roughly $70 a barrel.
No sooner had global demand regained some of its momentum than it was confronted with the geopolitical tensions sweeping the international stage since 2022, most notably the Russian-Ukrainian war, at a time when Russia is the second-largest exporter of crude oil and the main exporter of gas to Europe. This was reflected in a sharp rise in the price of a barrel of oil, with Brent crude hitting $139 a barrel on the day following the outbreak of the war before retreating and returning to its 2021 price of $70 a barrel. That was due to the slowdown in the global economy and the move by European countries to increase their reliance on alternative sources and clean, renewable energy.
With the onset of the Israeli aggression on Gaza on October 8, 2023, followed by the resistance operations in support of Gaza from southern Lebanon, which the Israeli enemy quickly turned into an all-out aggression against Lebanon, the average price of a barrel of oil rose once again to reach $83, an increase of 14% over its level in 2022. In 2024, the price of a barrel of oil fluctuated, falling during the first half of the year to roughly $74, rising again at the beginning of the second half to briefly record $81, and then declining during the third quarter of the year to stand at $75 today.
Oil prices had fallen by 3%, causing losses in trading on Tuesday, October 15, 2024, after media reports suggested Israel would refrain from striking Iranian oil targets, easing fears of a disruption to oil and gas supplies. The price drop of about four dollars last week wiped out the cumulative gains made over seven sessions up to Friday, October 11, 2024, driven by investor concern over the risks surrounding supplies as Israel prepared to retaliate against Iran's recent attack.
Economic factors play a decisive role in steering oil prices and determining their levels, as these prices fall whenever fears concerning a global economic slowdown grow, alongside other economic factors such as interest rates, whose reduction helps boost consumption and in turn leads to higher oil prices. Oil prices would have been threatened with further decline had major producing countries not taken the initiative to cut their output, while lower prices encouraged oil-consuming countries to rebuild their crude inventories and consequently stimulated demand once again.
By contrast, after geopolitical tensions had played the most prominent role in influencing oil prices, today we find the impact of these tensions confined to causing short-term fluctuations. Despite the continuation of the Russian-Ukrainian war, as well as the ongoing Israeli war on Gaza and the expansion of its aggression against Lebanon, in addition to the entry of the Houthis and certain Iraqi groups into the conflict, with all the fears this raises over the stability of the entire region, we find that the oil markets' reaction has been limited to a temporary and modest rise in oil prices.
The waning impact of the region's geopolitical conflicts on oil prices lies in the adoption by Arab oil-producing countries of a policy of dissociation from the war raging in Lebanon and in Gaza, and their abstention from using oil as a tool of pressure against the countries that support Israel in its brutal aggression, as they did in 1973. This strips oil of its status as a strategic commodity despite its pivotal role in the global economy, owing to the inability of producing countries to control their resources in a way that serves their national interests and causes.
Also contributing to curbing the impact of these conflicts has been the higher output volume of countries outside the Organization of the Petroleum Exporting Countries (OPEC), particularly those subject to US sanctions, creating a parallel market in the service of major consumers, especially the United States of America. Indeed, these sanctions have not prevented the sanctioned countries from exporting, but rather have helped keep prices at low levels suited to the interests of consuming countries.
Translated from Arabic with AI. Read it in Arabic