Mideast conflict reveals shifts in global energy landscape

Iran launched a missile attack on a U.S. military base located in Qatar on Monday, sparking concerns about escalating tensions in the Middle East—a crucial area for global oil supply, accounting for nearly one-third of the world’s oil consumption annually. Surprisingly, this military move coincided with a dramatic drop of over 7% in benchmark U.S. crude oil prices, marking it as one of the major sell-offs witnessed this year. The subsequent day saw a similar trend, leading to crude prices decreasing substantially over the week.
The unexpected dip in energy prices underscores a new global oil surplus, suggesting we’re living in a world that is richly endowed with oil. Although gas prices have remained largely unchanged this week, experts predict a likely drop at the gas pumps, potentially as early as this weekend.
The precarious nature of Middle Eastern geopolitical stability raises the possibility of Iran potentially blocking the Strait of Hormuz. This strategic route is instrumental for transporting approximately 20% of the world’s oil daily. Although such action seems unlikely as it would impede Iran’s own oil mobility, the landscape of global energy has seen significant transformations since the Arab oil embargo some 50 years ago—which once wreaked havoc on the U.S. economy and drove energy prices to an all-time high.
The global oil horizon has been reshaped by new forces influencing supply and demand, impacting what consumers will see at the gas pump this weekend.
Over the past two decades, advancements in technology have significantly altered global energy dynamics, propelling the U.S. to the forefront as the leading oil producer, even surpassing Saudi Arabia by 2018. This ongoing oil surplus has repeatedly exerted downward pressure on prices.
Over the past three years, gas prices have witnessed a steady decline, remaining consistent even during traditionally high-demand periods, such as the peak summer travel season. A portion of this trend, as explained by Patrick De Haan, head of petroleum analysis at GasBuddy, can be attributed to the U.S. announcing stringent tariffs on trading partners during the time gas prices typically surge. This has resulted in subdued consumer and business demand, caused by anticipated economic repercussions of an extensive trade war.
The anticipated fall in prices is expected to accelerate soon. The reason motorists haven’t observed a significant drop in gas prices yet is due to gas stations purchasing their supplies before the recent oil slump, creating a typical lag between oil and gas prices. Patrick De Haan forecasts that the national average prices are likely to halt their increase imminently and might stabilize briefly before dropping by the weekend.
On Wednesday, the average retail gas price in the U.S. stood at $3.23 per gallon—a decrease from $3.47 the previous year. By June 2022, the U.S. hit a record high with the average price per gallon reaching over $5, according to AAA.
The U.S. is experiencing unprecedented production levels of natural gas and crude oil. Consequently, oil companies find it economically unwise to continue drilling with such low prices, leading to reduced drilling activities. Laboratory studies show that the decrease in active oil rigs is more than 19% year-on-year.
With drilling operations slowing, the expectation would be a shortfall in supply and a rise in prices. Yet, producers outside the U.S., including the OPEC+ group, are enhancing their output, balancing the supply chain. Moreover, the S&P Global Commodity Insights estimates the Canadian oil sands are poised for record levels of production this year.
The collision between these supply dynamics and a dwindling global oil demand further complicates the scenario. The IEA confirmed that the crude oil’s share has dipped below 30% for the first time while the demand incremented merely 0.8% last year. Part of the shift is attributed to the automotive industry’s progressive adoption of electric vehicles (EVs), causing a reduction in crude oil’s market demand. Increasingly efficient fossil fuel-powered engines across various modes of transport are also a contributing factor.
Amidst economic apprehensions and potential trade conflicts, individuals and airlines alike are retracting operations, leading to a steeper decline in oil prices.
Advancements in alternative energy sources, extending beyond the transportation industry, are poised to redefine the energy discourse. The IEA reports indicate substantial growth in renewable energy, with wind and solar contributing markedly to the global increase in electricity generation. As alternative energies like natural gas take the limelight, traditional oil finds its demand further diminished.
Major tech corporations in the U.S. are making strategic investments in nuclear energy, illustrating an alignment towards sustainable energy solutions for futuristic projects such as AI and data centers. Companies like Meta, Microsoft, Amazon, and Google have highlighted nuclear energy partnerships over the last year, hinting at a transformative era for the energy sector.