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Middle East tensions will fuel energy price volatility

Oil prices look set to surge once again. Credit: Getty

April 15, 2024 - 7:00am

A war of words is being waged among allies over energy markets. Andriy Kobolyev, the head of the Ukrainian state-owned oil company Naftogaz, warned that Russian attacks on Ukrainian energy infrastructure would lead to a rise in global energy prices. This comes in response to calls from the Biden administration for Ukraine to stop hitting Russian refineries because they believe it is one of the drivers behind the recent surge in the oil price.

It is difficult to see how attacks on Ukrainian energy infrastructure might impact global energy markets. Ukraine is the 61st largest oil producer in the world, and the 55,000 barrels a day it produces are barely a drop in the bucket of global oil markets. Russia, on the other hand, is the world’s second-largest oil producer, pumping out over 10 million barrels per day.

The reality is that President Biden is now more concerned about his election prospects than he is enthusiastic about Ukraine hitting Russia’s economy. It is now absolutely clear that the economy is the Biden administration’s biggest liability in the upcoming election, with nearly a third of voters ranking the economy and jobs as their main concern. Last week inflation came in hot, and it is becoming increasingly clear that Biden will likely not get the large decreases in interest rates that he has all but promised voters.

The fact that the Biden team held out hope that energy prices would not rise in 2024 shows to what extent the administration has reverted to crude “wishcasting” — that is, forecasting future outcomes in lines with one’s desires — in its economic and electoral strategy. Late last year the Saudis and the Russians announced large oil production cuts in order to drive energy prices higher. Rather than seriously analyse this trend and its likely impact on energy prices, the White House and its allies failed to respond accordingly.

This spell was not even broken by the Houthi attacks in the Red Sea, which led to oil transport through the Suez Canal falling off a cliff. The markets responded by ignoring these realities — seemingly preferring to follow a highly irrational attempt by hedge funds to sell the market short. Such trends cannot last forever and now the underlying realities of the market are setting in and prices are increasing — just in time for the 2024 election.

On top of all this, a new risk has been placed on the table: an all-out war between Israel and Iran. The massive and unprecedented missile barrage that Iran fired at Israel has placed the ball firmly in the Israeli court: do they back down or do they escalate? And if they take their revenge, does this result in an upward spiral of escalation that ends in a full-blown war — possibly even pulling in the United States?

If this were to happen the impact on global energy markets would likely be worse than that seen at the beginning of the Ukraine war. This is because it is widely assumed that, in the case of all-out war, the Iranians would close the Strait of Hormuz, which as a key trade hub in the Middle East that accounts for around 30% of the world’s seaborne oil trade.

Even if the worst does not happen in the Middle East, it is very hard today to make a case that oil prices will fall. With all components of supply looking bullish, the only real hope would be a collapse of demand — that is, a global recession, likely led by the United States. This is not on the cards, but even if it were, it would be even worse for Biden’s electoral prospects than another bout of energy inflation.

The Biden team should have analysed the situation realistically and tried their best to cool global tensions. It is now far too late for that; the President and his supporters are doomed to reap what they sowed.

Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics


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Graham Stull
Graham Stull
1 month ago

All quite true, but the stakes are even higher. What is happening in 2024 is not just about Biden’s reelection, it’s about the entire world order.
The American Empire is being challenged. The question is, does the Empire settle with its rivals and work to build a new, multi-polar world order? Or does it fight WWIII? And if it fights, does it win? Does anyone win?
My money is on the former, but maybe that’s just because I have grown up in the long Indian summer of the Pax Americana and I have a hard time imagining anything as ground-shifting as total war between, on the one hand, the US, Europe, Japan, Australia, South Korea and on the other, the Pan-Asian Powers.
And if war does break out, I honestly have no idea who will actually win it, if anyone at all. Patriots versus Kinzhals? SU-75s versus F-22s? It’s all Greek to me…