Oil prices go up and down due to environmental conditions, geopolitical tensions and ability of countries to take up the slack when supply is restricted elsewhere. Shipping is a major player in the delivery of oil and changes up and down in the price inevitably puts pressure on the companies and businesses, and their ability to make available maritime jobs and careers for those choosing such a path for their profession.
Specifically, to do with oil prices, worries recently over recent geopolitical tensions and tariff increases have created uncertainties for investors and therefore for the industries, that depend on oil, and those that supply the necessary infrastructure to keep oil travelling around the world. Tensions in the Middle East are putting a strain on the future assurances relied on by the rest of the particularly developed world for the supply of oil.
Oil prices went up by 12% after the attack by Israel on the Iranian oil facilities. Iran produces about 3.3 million barrels of oil per day and two million of these are exported. The International Energy Agency report that global oil demand is up to 103.9 million barrels per day. This sounds like a lot but when UAE and Sudi Arabia say they can pick up the slack when Iranian supplies are restricted by choice or otherwise it seems that any uncertainties can, with some degree of surprise, be managed. A greater concern is the fact that with the conflict between Iran and Israel, still threatening to continue or to pick up again, Iran could attempt to close the Strait of Hormuz to tankers or even worse, attack other countries’ tankers in that region.
Historical Indicators
In 2023 the European Central Bank published a report in which they suggest that the interplay of geopolitical uncertainty, oil prices and macroeconomics is not often straightforward. Their report made use of the impact of Brent Crude prices after the 9/11 attack on the Twin Towers, wherein the price leapt 5% due to doubts over whether the Middle East could be relied upon to keep up the supply amid the tensions. But they were down by 25% after 14 days as fears that a slowing global economy would weaken oil demand, came to the fore. Regarding Russia’s invasion of Ukraine, Brent prices went up 30% following the onset but were back at pre-invasion levels after 8 weeks.
It is called the convenience yield, where doubts over the supply of oil cause an increase in the value of holding oil contracts. This puts upward pressure on oil prices. Conversely it has to be added that, in the longer term, the economic channel activity comes into play where increased uncertainty weighs on investment and consumption, and can affect trade. This channel creates a downturn on global oil demand and prices. In other words, oil price pressure with regard to geopolitical shocks can be short-lived.
This has not always been the case. The shock to oil prices in 1973 and 1979 were followed by US recessions and the potential for a geopolitically driven oil price spike to upset the global economy does still concerns policymakers and investors. However, a model based on research done by The Federal Reserve Bank of Dallas suggests that a large upturn in the risk of a type, known in1973/9, would only lower economic output by 0.12%. Again, it must be noted that the situation following the embargo in the 1973 crisis stands out as an exception in economics because global equity markets were still sharply lower some 12 months later.
It is expected that even though the Iran- Israel conflict can still have an adverse effect on the oil industry, the industry in general will be able to contain any large-scale problems.
