The Abu Dhabi National Oil Company’s Ruwais Refinery in March 2020. Photo courtesy of  Rickmaj via Wikimedia Commons.

By ELAI RETTIG

JNS

Despite the intense 12-day military confrontation between Israel and Iran, global oil markets remained remarkably calm in recent weeks. Oil prices saw only minor fluctuations, rising briefly from $68 to $77 per barrel, before swiftly returning to pre-conflict levels. Even if the worst-case scenario had come to pass and Iran blocked the critical Strait of Hormuz, through which about 20 million barrels of oil transits each day, major banks and analysts such as J.P. Morgan and Goldman Sachs forecasted oil prices peaking at $120 per barrel, only to rapidly decline below $70 by the end of 2025.

Market Fluctuations

These assessments stand in stark contrast to predictions made three years earlier, when a similar scenario would have driven prices as high as $250 per barrel. Why did the markets react so differently this time?

Global oil markets currently benefit from a significant oversupply that keeps oil prices low, even under extreme scenarios. Despite all the geopolitical mystique surrounding the market, oil prices are determined by the simple economic principle of supply and demand. When markets are saturated, even severe geopolitical tensions in critical regions, like the Middle East, have limited influence on prices.

A historical parallel would be the Iran-Iraq war from 1980 to 1988, during which both countries attacked the oil infrastructure and tankers of the other side, and Iran even attempted blockades of the Strait of Hormuz. Despite this turmoil, oil prices declined during those years, supported by increased production from non-OPEC countries, notably the Soviet Union, and decreasing demand from Western nations that were already shifting away from oil to nuclear and coal as the main fuel for the electricity generation.

Similar dynamics are at play today. Robust oil production in Russia and the United States, combined with stagnating Chinese demand due to advancements in electric vehicles and renewable energy sources, has kept global supply ample. The announcement by OPEC+ members that they will continue to increase oil production despite falling prices has further strengthened the overall sentiment that the market is awash with excess oil. According to a June report by the International Energy Agency, oil production capacity is expected to significantly exceed demand growth through 2030, leading to predictions that oil prices will remain relatively low for the next five years.

Contingency Plans

A second major factor that calmed the markets was the existence of alternative oil suppliers and logistical options in case of a disruption in the Strait of Hormuz. In anticipation of a possible Iranian blockade, the United States issued assurances that it could rapidly deploy its Strategic Petroleum Reserves to the global market to lower prices. In addition, Saudi Arabia and the United Arab Emirates have already developed contingency plans to bypass Hormuz through strategic pipeline infrastructures, ensuring oil passage even if the strait is blocked. Saudi Arabia’s east-west pipeline, with a capacity of 7 million barrels per day, allows oil shipments directly to the Red Sea.

Meanwhile, the United Arab Emirates maintains a pipeline to its coastal city of Fujairah, which would bypass the Strait of Hormuz, rerouting approximately half of its exports directly to the other side of the strait. Although these solutions are not without complications, they nonetheless provide markets with sufficient assurance.

Value Of Alternative Routes

Additionally, nations lacking such infrastructure, notably Iraq, Kuwait and Qatar, have begun to realize the value of alternative export routes that bypass the Strait of Hormuz. For more than a decade, Iraq has expressed a desire to build an oil pipeline to the port of Aqaba in Jordan as a way to bypass the strait. Recently, Qatar has also contemplated exploiting the regime change in Syria to build pipelines to the eastern Mediterranean or to Turkey to achieve the same resilience as the Saudis and the United Arab Emirates. Although such projects are far away from being realized, the recent turmoil is likely to boost the voices that call for their advancement.

China Concerns

Geopolitical calculations around China’s response to potential disruptions in the Strait of Hormuz have also influenced market sentiment. China is the primary destination for 45% of the oil transported through the Strait of Hormuz. Roughly 90% of Iranian oil exports go to China, typically at a discounted rate of around $3.50 per barrel, which is shipped to China via “shadow fleets” that go through Oman and/or Malaysia to conceal their Iranian sources. In the event of a blockade of the Strait of Hormuz, China would face the most significant disruptions and would likely pressure Iran to cease such operations. If the disruption continued, China would likely seek alternative suppliers such as Saudi Arabia, the United Arab Emirates and even the United States, further hurting Iran’s economy. Consequently, Iran would inadvertently harm its principal ally by instigating a blockade and presenting itself as an unreliable supplier, further undermining the strategic rationale for such a move.

Looking ahead, China will seek to mitigate its vulnerability to disruptions in the Gulf region by diversifying oil imports from more stable suppliers such as Russia, Venezuela and various African nations. Additionally, despite inherent geopolitical complexities, regional cooperation in developing alternative transit routes is becoming increasingly attractive.

Israel To Improve Relations?

Projects like the India-Middle East-Europe Economic Corridor (IMEC), which involves Israel, have the potential to transform regional energy logistics significantly. However, for such projects to succeed, Israel must prioritize diplomatic normalization with Saudi Arabia, improve relations with Jordan and find sustainable resolutions to conflicts such as the ongoing war in Gaza.

Ultimately, the limited response by oil markets to the recent Israel-Iran conflict underscores a new reality: Geopolitical risk in key energy corridors remains significant, but its capacity to drastically disrupt global markets has diminished, reflecting structural changes in supply dynamics, alternative infrastructures and geopolitical alliances.

 

Elai Rettig is an assistant professor in the department of political studies and a senior research fellow at the Begin-Sadat Center for Strategic Studies at Bar-Ilan University