Although this battle won't be like the one over oil in 1973, it still has the potential to be unpleasant

 Although this battle won't be like the one over oil in 1973, it still has the potential to be unpleasant

Although history seldom rhymes, it does not repeat itself. The comparison between October 2023 and October 1973 is straightforward given that they are both [so near to] the 50th anniversary of the world's first oil crisis: an unexpected assault on Israel and an increase in crude oil prices worldwide. But that's where their similarities stop.

A new Arab oil embargo that would quadruple the price of a barrel of petroleum is not ready to hit the world economy. However, it would be a mistake to minimize the likelihood that oil prices would continue to rise globally.

The situation is tumultuous at the moment, and everything for the oil market hinges on how Israel reacts to the Palestinian organization Hamas, who carried out the assault on Saturday morning, October 6, and to Iran, which often controls that outfit. At this moment, though [despite the surge in oil prices], we may make the following speculative judgments:

First, the situation does not like that of October 1973: no Arab nation is simultaneously assaulting Israel. The Arab world as a whole, including Egypt, Jordan, Syria, Saudi Arabia, and the rest, is observing the events from a distance rather than influencing them.

Two, none of the features of the oil market prior to October 1973 exist today: The world's oil consumption was soaring at the time, fifty years ago, and the world's spare production capacity had essentially been used up. [The situation has changed.] The rise of oil consumption has slowed and is projected to continue to decline as electric cars (EVs) become more commonplace globally. Saudi Arabia and the United Arab Emirates also have a lot of extra capacity that they may employ to lower costs if they so want.

Three, and perhaps most significantly, OPEC (Organization of the Petroleum Exporting Countries) members aren't attempting to raise prices beyond a few dollars more today: Instead of driving oil prices more than 100% higher to $200 per barrel, Saudi Arabia [with its strong influence over OPEC] would be fine with them climbing another 10–20% higher, to just beyond $100 a barrel from approximately $85 now. Prior to the oil embargo in October 1973, OPEC members unilaterally increased official gasoline prices by nearly 70%. Although the embargo is the aspect of the crisis that people remember the most clearly, the price increase was just as significant.

Fourth, there's still a chance that the aftermath may affect oil markets in 2023 and 2024.If Israel comes to the conclusion that Hamas followed Tehran's orders, it might have the most direct effect. In such situation, oil prices may rise significantly. Iran proved in 2019 that it has the ability to significantly reduce Saudi Arabia's oil production capacity by using proxies in Yemen. If it comes under Israeli or American assault, it may respond by doing the same.

Five, even if Israel doesn't react right away to Iran, the consequences will probably have an impact on Iranian oil production: Since the end of 2022, Washington has ignored the fact that Iranian oil shipments are increasing and evading American sanctions. An unofficial détente with Tehran was given top emphasis in Washington. Iranian oil production has increased this year by around 700,000 barrels per day, making it the second-largest source of additional supply in 2023, behind US shale. Now, it's probable that the White House will carry out those measures. That may be sufficient to raise oil prices to $100 per barrel and perhaps higher.

Sixth, any Middle East oil crisis will be advantageous for Russia. If Washington carries out its threats of sanctions on Iran, it may open up opportunities for Russia's sanctioned barrels to increase market share and command higher prices. Because it harmed Russia, the White House ignored Iranian oil shipments, among other things. As the White House eases sanctions to reduce market pressure, Venezuela may also gain.

Seventh, the Saudi-Israeli diplomatic agreement, which many had scheduled for the beginning to the middle of 2024, has been lost: It's difficult to see how Saudi Arabia's Crown Prince Mohammed bin Salman would be able to sell the agreement domestically, even if Riyadh is probably incensed with Hamas. That, in turn, [goes against] the possibility that Riyadh would increase oil production in order to aid the approval of an agreement in Washington. The recent warming of relations between Saudi Arabia and Iran, which was also negative for oil prices, is the second casualty of the conflict between Israel and Hamas.

The ability of Washington to draw from its Strategic Petroleum Reserve to lessen the effect on American gasoline prices—and on President Joe Biden's popularity rating—is the last significant change from 1973. The White House will undoubtedly deploy the SPR if Middle Eastern tensions produce a spike in oil prices. The reserve still has enough oil in it to go through another crisis even if it is at its lowest point in 40 years. ©bloomberg