The last couple of years have seen a series of extraordinary events, most notably the invasion of Ukraine by Russia on 24 February 2022 and the Hamas attacks on Israel on 7 October 2023. This year may well see more equally extraordinary things, with the widening out of the Israel-Hamas War a distinct possibility, as is a ratcheting up of tensions between China and Taiwan, and between North Korea and South Korea. All three would involve the U.S., China, and Russia in one way or another, and all three scenarios carry with them the threat of a sudden spike in all prices. Other events, less predictable, may also emerge that would do the same.
That said, as extraordinary as these events have been, the benchmark Brent oil price began 2023 trading at a high of around US$85.88 per barrel (pb) and closed this year lower – at a high of about US$77.96 pb. These numbers mark an extraordinary achievement for those countries that are the biggest net consumers of oil at the expense of those that are the biggest net producers of oil. This is exactly the opposite of what happened just over 50 years ago after an Arab coalition invaded Israel on 6 October 1973, marking the beginning of the Yom Kippur War.
That war directly led to the 1973/74 Oil Crisis, as analysed in full in my new book on the new global oil market order. The Crisis came as OPEC members – plus Egypt, Syria, and Tunisia – placed an embargo on oil exports to the U.S., the U.K., Japan, Canada, and the Netherlands in response to their collective supplying of arms, intelligence resources, and logistical support to Israel during the War. By the end of the embargo in March 1974, the price of oil had risen around 267 per cent, from about US$3 per barrel (pb) to over US$11 pb.
This, in turn, stoked the fire of a global economic slowdown, especially felt in the net oil-importing countries of the West. As highlighted by the then-Saudi Minister of Oil and Mineral Reserves, Sheikh Ahmed Zaki Yamani – widely credited with formulating the Saudi and OPEC strategy – the embargo definitively marked a dramatic shift in in the balance of power in the global oil market from the big consumers of oil (mainly in the West at that time) to the big producers of oil (mainly in the Middle East at that point).
Yamani was not the only one to think this – the late U.S. geopolitical strategist Henry Kissinger did too, and this realisation formed the basis of all the U.S.’s energy-related foreign policy from that point to now. After the 1974/74 Oil Crisis had ended, Kissinger – who served as U.S. National Security Advisor from January 1969 to November 1975 and Secretary of State from September 1973 to January 1977 – told every president he advised (virtually all of them in one way or another) of the three conclusions he had reached as a result of the Crisis, as also analysed in depth in my new book on the new global oil market order.
The first was that Saudi Arabia and its fellow OPEC members could never be trusted again by the U.S. as the Crisis had seen the Kingdom break the foundation stone agreement between the two countries made back on 14 February 1945 between the then-US President, Franklin D Roosevelt, and the then-Saudi King, Abdulaziz bin Abdul Rahman Al Saud. This deal was simply that the U.S. would receive all the oil supplies it needed for as long as Saudi Arabia had oil in place and, in return for this, the U.S. would guarantee the security both of Saudi Arabia and its ruling House of Saud. Kissinger’s second conclusion was that the U.S. needed to expedite its efforts to become self-sufficient in energy resources as soon as possible. Third, Kissinger concluded that the best course of action for the U.S. to keep obtaining all the oil and gas it needed to retain its top global economic and political position was to ensure that the Middle Eastern countries did not band together again in the future against the U.S.
The optimal way for the U.S. to ensure this, he successfully argued, was to use the ‘divide and rule’ principle between the region’s major oil and gas producers, which in turn was a variant of the ‘triangular diplomacy’ he had advocated and used to great effect in the U.S.’s dealings with Russia and China at that time. In short, this involved playing one side off against the other by leveraging whatever fault lines ran through the target countries at any given time, be they economic, political, or religious, or any combination thereof.
Kissinger lived to see the balance of power in the global oil markets begin to swing back away from the Middle East’s oil producers and towards the net consumers of the U.S. and its allies, with the inexorable rise of the U.S.’s shale oil sector. This started in earnest in 2010 (shale gas from 2006) and by 2013 the rise in output was virtually a straight vertical line. By 2014, Saudi Arabia believed that the U.S.’s shale oil and gas posed an existential threat to its place in the world and the continued rule of the Al Saud royal family. In an attempt to destroy – or at least significantly disable – the then-nascent U.S. shale sector, Saudi Arabia led its OPEC brothers into the 2014-2016 Oil Price War, as covered in depth in my new book on the new global oil market order.
The OPEC tactic was to enormously oversupply the market, pushing oil prices down to levels that would bankrupt the U.S.’s shale oil producers. However, the Saudis and OPEC had seriously underestimated the ability of the U.S. shale sector to adapt and then thrive on much lower oil prices than even the Saudis or its OPEC brothers could endure.
From that point, the U.S. began to put into place an informal range of where it wanted the oil price. As also analysed in full in my new book, the floor of the range is US$40-45 pb of Brent, as it is seen as the price at which U.S. shale oil producers can survive and make decent profits. The ceiling of the range is regarded as US$75-80 pb of Brent for two reasons – one political and one economic, although they are linked. The political reason is that since the end of World War I in 2018, the sitting U.S. president has won re-election 11 times out of 11 if the economy was not in recession within two years of an upcoming election.
However, if it was in recession in this timeframe, then only 1 sitting president has won out of 7 times (although even the 1 is debatable). The economic reason based on longstanding estimates is that every US$10 pb change in the price of crude oil results in a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent that the average price per gallon of gasoline rises, more than US$1 billion per year in consumer spending is lost. Historically, around 70 per cent of the price of gasoline is derived from the global oil price.
Crucially for 2024’s oil price as well is that this U.S. oil price range is very close to what is wanted by the other big global power – China. Unlike the 1973/74 Oil Crisis, China is now a huge global consumer of oil, and so are the countries with which it does most of its business. Beijing’s notable reluctance to fan the flames of conflict in Israel, or the Middle East as a whole, derives from these factors as they correlate to its currently precarious economic position, which would be made even worse if oil prices suddenly spiked much higher and/or the U.S. went back into full-scale Trade War mode with it.
The economies of the West remain its key export bloc, with the U.S. still accounting for over 16 per cent of China’s export revenues on its own. According to a senior source in the European Union’s (E.U.) energy security complex spoken to exclusively by OilPrice.com recently, the economic damage to China – directly through its energy imports and indirectly through damage to the economies of its key export markets in the West – would dangerously increase if the Brent oil price remained over US$90-95 pb for more than one quarter of a year.
This article was first published on OilPrice.com