The global oil crisis may spread

Why is the geopolitical uniqueness of this oil crisis so prominent?

The picture shows vehicles queuing to refuel at a gas station in Madrid, Spain, on March 9. (Xinhua News Agency)

The US-Israel-Iran conflict has lasted over a month, and its outcome remains unpredictable. Its direct impact is the disruption of the global oil supply and demand balance, with international oil prices reaching a record high of over $100 per barrel. A worldwide oil crisis has already arrived.

In March this year, the New York market’s light crude oil futures increased by over 50% for the month, and on March 31, Brent crude oil futures briefly broke through $118 per barrel during trading, with a monthly increase of nearly 60%, even surpassing the rise during the Gulf War in 1990. The International Energy Agency pointed out that this surge in oil prices is faster and larger than the impacts seen during the 2011 Libyan war and the 2022 Russia-Ukraine conflict, representing a sudden supply shock that is difficult to resolve in the short term.

The US-Israel-Iran conflict has caused a complete imbalance in global oil supply and demand, with geopolitical conflicts blocking major energy transportation routes. The Strait of Hormuz accounts for 20% to 25% of global maritime crude oil trade, with an average daily transit of 20 million barrels, and a quarter of the world’s oil consumption depends on its navigation. After the conflict erupted, Iran implemented a “precise blockade,” causing transit through the Strait of Hormuz to plummet by 90% to 95%, with hundreds of oil tankers stranded, creating a dilemma of “capacity available, transportation halted.” Macquarie Group, an Australian investment bank, estimates that by the end of March, 13% of global oil production was forced offline, with about 16 million barrels of crude oil unable to flow daily, exceeding the peak of the previous three oil crises. Even with the International Energy Agency coordinating the release of the largest-ever strategic petroleum reserve of 400 million barrels, it can only cover about one-tenth of the daily shortfall; recently, the Bab el-Mandeb Strait faced threats from Houthi forces, causing shipping insurance costs to double and rerouting around the Cape of Good Hope to increase costs by 50%, greatly increasing diversion pressure. The global oil supply and demand are severely unbalanced, with supply-side difficulties, while on the demand side, last year’s global daily consumption was 105 million barrels, and industrial and transportation needs are hard to reduce. Currently, high oil prices have caused product shortages in many Asian countries, with the Philippines declaring a state of energy emergency and South Korea launching nationwide energy conservation measures. European countries are generally facing inflation threats driven by energy shortages.

In the short term, geopolitical conflicts remain the decisive factor, and oil prices are expected to fluctuate at high levels. Market analysts predict that if the conflict continues until the end of June, Brent crude will rise to $200 per barrel, and West Texas Intermediate (WTI) will reach $180 per barrel. Morgan Stanley research suggests that if a phased agreement is reached in May, the average price of Brent crude in the second quarter will be $114 per barrel, falling back to $95 in the third quarter. The IEA warns that if the conflict persists for three months, oil prices will stay between $100 and $120 per barrel, with further escalation pushing prices beyond $150.

The oil crisis will trigger a series of vicious cycles, with market panic further amplifying. Compared to the previous three oil crises in history, this crisis shares common features but also exhibits new characteristics due to the current global geopolitical situation, with far-reaching impacts. The crisis has four core features, highlighting its uniqueness.

First, it is dominated by geopolitics, with a stronger suddenness. The direct military confrontation between the US, Israel, and Iran, targeting the lifeline of oil transportation, is far more targeted and intense than before, with extremely rapid crisis transmission, causing global turmoil in the short term. Second, supply blockages are more prominent, with more systematic transmission. The core issue is the “loss of circulation” caused by blockade of transportation routes; both the Strait of Hormuz and the Bab el-Mandeb Strait face risks, with blockages propagating through upstream and downstream industries, leading to a global systemic supply chain crisis. Third, market panic and volatility are more extreme. Fear and speculative trading amplify price swings, with daily fluctuations exceeding 5%, creating high uncertainty. Fourth, the global market is affected, with broader impacts. The rapid transmission of soaring oil prices hits emerging markets harder due to their high energy dependence and limited foreign exchange reserves, plunging them into “rising import costs, currency devaluation, and increased debt,” creating multiple hardships.

From the current situation, if the Middle East military conflict persists, three potential new scenarios with huge destructive power may emerge. First, simultaneous blockade of the Bab el-Mandeb Strait and the Strait of Hormuz could expand the oil supply gap, with extreme cases causing daily global supply disruptions exceeding 20 million barrels, leading to energy shortages and a global energy trade caught in “high costs and low efficiency.” Second, the oil crisis could deeply infiltrate the industrial chain, causing supply chain crises. Europe’s energy-intensive industries have already cut production by 20% to 30%; if the crisis continues, the scope of shutdowns will expand. The blockade of the Bab el-Mandeb Strait could also affect 30% of global container shipping, raising logistics costs and creating a vicious cycle of “energy crisis—supply chain crisis—inflation crisis,” potentially leading to global stagflation. Third, geopolitical conflicts could spill over, escalating regional instability. The US-Israel-Iran conflict might affect more Middle Eastern oil-producing countries; competition for energy resources could intensify geopolitical struggles, with some countries adopting extreme measures. Meanwhile, the US dollar-based oil system could accelerate its disintegration, triggering turmoil in the global monetary system—an unprecedented risk in past oil crises.

In the face of severe geopolitical shifts, the oil crisis, and potential new scenarios, the immediate priority is to ease the current predicament, reduce the threat of conflict escalation, and fundamentally prevent future risks. Efforts should focus on safeguarding transportation routes, promoting US-Iran negotiations, and gradually restoring navigation through both straits to break supply blockages. In terms of oil supply, coordinate to accelerate the release of strategic reserves to stabilize market prices; moderately exempt certain countries from oil sanctions; encourage OPEC+ and non-OPEC oil-producing countries, including US shale oil companies, to increase production to ease supply-demand imbalances. Some experts also suggest establishing emergency coordination mechanisms and strengthening international energy policy cooperation to jointly address new situations like the blockade of both straits and supply chain disruptions.

Geopolitical conflicts will inevitably lead to a shift upward in the oil price center and a reconfiguration of the energy landscape. Whether Middle Eastern conflicts ease or not, the fragility of global oil supply has been exposed. Extreme geopolitical events could trigger short-term price surges, with prices surpassing $200 per barrel, risking a global recession. In the long term, the energy landscape is expected to evolve toward diversification and decarbonization, breaking the traditional dominance of oil, with renewable energy gaining further prominence. Alongside the impact on the US dollar hegemony, the global monetary and geopolitical order will also undergo reconfiguration. (Author: Weng Donghui, Source: Economic Daily)