Chart of the Week

THE OIL PRICE & GEOPOLITICAL RISK

It is striking how well the oil market has digested the recent events in the Middle East. Brent crude prices have been trading in a tight range around U$75-80/bl since early December, when the Houthi rebels began escalating their attacks against commercial ships travelling through the region.

This is partly because oil tankers are not being targeted, limiting the supply disruption for energy markets. But it also reflects the fact the impact of geopolitics on markets is often overstated.

This certainly wasn’t the case in the 1970s when multiple supply shocks, stemming from the Arab Oil Embargo and Iranian Revolution, sent oil prices sharply higher. Yet, in more recent years, major events like the Iraq wars, the Arab Spring and Russia’s invasion of Ukraine have typically seen any price spikes quickly unwind.

There are many reasons for this. One being that world oil supply is less concentrated in the Middle East compared to 50 years ago. Another is that developed economies now hold larger strategic oil reserves, which help to alleviate the pressures of any temporary supply squeezes. However, the main reason is that the global economy has become much less dependent on oil over the past few decades with services (rather than commodity-intensive industries) dominating most economic activity.