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If War Breaks Out Again in The Middle East, Will The Oil Crisis Reappear?


The Middle East is the world's most important oil-producing region and the most unstable geopolitical region. The conflict between Palestine and Israel has a long history, often resulting in local wars or terrorist attacks.

On October 7, 2023, the Palestinian armed organization Hamas fired hundreds of rockets from the Gaza Strip towards Israel, and Israel conducted multiple air strikes on the Gaza Strip. The conflict between the two sides resulted in hundreds of deaths and casualties, and also attracted widespread attention and condemnation from the international community. The impact of the Palestinian-Israeli conflict on international oil prices is mainly reflected in two aspects: first, it increases the risk aversion sentiment in the market, causing investors to sell risky assets and turn to gold, crude oil and other safe-haven assets; second, it increases the oil price in the Middle East The uncertainty of supply has led to concerns that the conflict may spread to other important oil-producing countries, such as Iran and Iraq, or affect the safety of oil transportation. Therefore, after the outbreak of the Palestinian-Israeli conflict, international oil prices rose sharply.

However, industry insiders believe that the current round of Palestinian-Israeli conflict will be difficult to replicate the 1973 oil crisis and will have a limited effect on pushing up oil prices. The reasons are as follows: First, neither Palestine nor Israel are major oil producers or consumers, and have little direct impact on the oil market; second, global oil supply and demand are currently relatively balanced, and the OPEC+ alliance has provided support for oil prices through voluntary production cuts. Third, as the world's largest oil producer and consumer, the United States has sufficient strategic reserves and shale gas resources, which can release supplies when necessary; fourth, the current Palestinian-Israeli conflict has not yet escalated into a full-scale war, and other oil-producing countries have also No intention was shown to intervene or support either side. Of course, these judgments are based on the premise that the conflict will not worsen further. To sum up, the "powder barrel" in the Middle East has rekindled and international oil prices have jumped, but the oil crisis is unlikely to happen again. Of course, this does not mean that political risks and oil market volatility in the Middle East can be ignored.

In addition, the oil market today is completely different from what it was in 1973.

Intuitively, even if OPEC takes measures such as production cuts and embargoes, it will not have the same effect as in 1973. On the one hand, this is because the global oil production pattern has become more diversified, and on the other hand, because oil has also changed in the international energy structure.

In 1973, more than 50% of global energy consumption was oil and about 20% was natural gas. By 2022, the proportion of oil will drop to 30%, and natural gas will still account for about 20%. The importance of oil has declined significantly.

However, even if the proportion of oil decreases, oil-producing countries can still increase oil prices by significantly reducing production (let’s not discuss whether they will do so). But does Saudi Arabia or OPEC have such a strong will?

Except for the plunge in oil prices in 2020 due to the epidemic, OPEC has been reluctant to adopt extreme production reduction and price protection policies in recent years. There is a core logic in this: In the context of the current energy transition, excessively high oil prices may accelerate the process of oil substitution, which will instead reduce oil demand and affect the interests of oil-producing countries.

Today in 2023, even if OPEC takes production reduction measures, there may be uncertain factors such as Russia's production reduction. Therefore, without touching their core interests, oil-producing countries represented by Saudi Arabia are unlikely to resume response measures similar to those in 1973.

In addition, another major difference between now and 1973 is precisely the result of the 1973 crisis: the United States and Europe both have a certain amount of oil reserves.

U.S. oil reserves have become a key factor affecting oil prices in recent years. Although U.S. oil reserves are at a 40-year low, according to Goldman Sachs estimates. But if there is an extreme oil crisis, this part of the budget can still offset some of the impact.