Oil shock could outlast conflicts

Oil prices remain volatile at elevated levels, fuelled by unfulfilled hopes of conflict resolution. An unprecedented share of global oil supply is caught in geopolitical tensions, putting a floor under prices. Supplies from West Asia and Russia face threats from hostilities and sanctions, while producers such as Libya and Venezuela grapple with internal political turmoil. The global outlook is clouded by low strategic reserves, uncertainty over supply resumption and the restoration of shipping routes. A vital resource has been weaponised to a remarkable degree, and the energy shock is likely to persist, with second-order effects on fertiliser and plastics prices.

Restoration of oil prices to their levels before the US-Iran conflict is remote over the next 12 mths as consuming countries prioritise replenishing their crude reserves. Oil-producing countries, on their part, face diverse outcomes in restoring production. Both processes will drag on even if the conflict is resolved immediately. The shipping industry will also need time to mark down risks for its tanker fleet. The world has priced in higher energy costs for the medium term at levels that are acceptable politically, but the risks of a slowing global economy are not as easily apparent. Greater clarity on this will determine the course of conflict resolution.

The oil shocks of the 2020s are by no means of lesser import than those of the 1970s. The intensity of oil price spikes was greater then, but the current situation could keep energy and associated prices high for longer. There's no effective supply response to oil and natural gas disruptions because the energy mix requires a baseline of fossil fuels alongside the growth in RE. India, for instance, has achieved a milestone with its non-fossil capacity crossing 50%, yet its vulnerability to imported energy shocks remains high. Energy shocks have become immune to conflict intensity as global demand is driven to new highs by emerging economies.