Global oil prices have been trading sideways over the past year as a result of a global supply glut, trade tensions between the United States and China, and fears related to a global economic slowdown. Although, tensions in the Middle East, particularly geopolitical issues in Iran, have kept oil prices from falling below $50 a barrel. While geopolitical tensions have been keeping oil prices in check, energy experts predict that if tensions continue to escalate into another war in the Middle East, oil prices may jump dramatically.
The Middle East contributes to about 30 percent of the world’s energy supplies, roughly 20 percent of global trade passages, and nearly four percent of the world’s GDP (Turak, 2019). If escalating tensions with Iran lead to a war, oil production in the Middle East would undoubtedly be impacted, which would cause global crude prices to rise significantly. Even though oil prices fell during the last week of November due to the resignation of Iraqi Prime Minister Adel Abdul-Mahdi, analysts say the situation in Iran may outweigh a drop in anti-government protests in Iraq (Domm, 2019).
With oil production hovering around five million barrels a day, Iraq is the second-largest oil producer in the Organization of the Petroleum Exporting Countries (OPEC) (Domm, 2019). As tensions in Iraq have been falling, tensions in Iran (another significant OPEC member) have been rising. After the U.S. pulled out of the nuclear deal and implemented sanctions on Iran, the Iranian Revolutionary Guard shot down a U.S. military drone over the Strait of Hormuz in June to send a message to the Washington. Moreover, in September, Iran launched a series of airstrikes against a massive Saudi Arabian oil facility.
Following a lengthy investigation related to the attacks on Saudi Arabia’s state-run oil facilities, U.S. intelligence officials say that Iran initially considered attacking American bases instead (Norman, 2019). The political risk consultant, Eurasia Group, predicts that a limited war with Iran would drive oil prices past $100 a barrel, while a massive conflict could push prices well above $150 a barrel (Turak, 2019). If Iran had attacked U.S. military bases instead of Saudi Arabia’s oil infrastructure, a major confrontation would have likely erupted in the region.
While Iran is OPEC’s third-largest oil producer, the country’s legal oil exports have dropped to zero following the Trump administration’s withdrawal from the 2015 Iran nuclear deal. Since then Iran has responded to crippling sanctions with threats against the U.S., drone attacks, and a series of oil tanker attacks in the Persian Gulf. Furthermore, Iran has begun to ramp up air defense drills with Mersad-16 surface-to-air missile systems over an area of about 416,000 square kilometers (O’Connor, 2019). As Iran continues to hone in on its military defense systems, experts have raised concerns over the likelihood of another attack.
After the attacks on Saudi Arabia’s oil facilities, Iranian Foreign Minister Mohammad Javad Zarif said in an interview with CNN that the country was prepared for “all-out war” if Saudi Arabia or the U.S. decided to retaliate with military force (Turak, 2019). Furthermore, Iranian President Hassan Rouhani has warned the U.N. General Assembly that the Middle East is on the brink of a major collapse if tensions continue to escalate.
Domm, P. (2019). “Falling oil prices may be misreading a tenuous situation in Iraq.” CNBC: https://www.cnbc.com/2019/11/29/falling-oil-prices-may-be-misreading-a-tenuous-situation-in-iraq.html
O’Connor, T. (2019). “Iran Holds Major Air War Games As U.S. Military Moves Through Top Oil Route.” Newsweek: https://www.newsweek.com/iran-large-air-defense-drills-1473362
Norman, G. (2019). “Iran considered striking US bases before deciding on Saudi Arabian oil fields, officials claim.” Fox News: https://www.foxnews.com/world/iran-held-meetings-before-saudi-attack-report-says
Turak, N. (2019). “Oil at $100? Experts predict where crude could go if an Iran conflict breaks out.” CNBC: https://www.cnbc.com/2019/06/06/heres-how-high-the-price-of-oil-could-go-if-conflict-broke-out-with-iran.html
Turak, N. (2019). “Oil will hit levels ‘we haven’t seen in our lifetimes’ if Iran isn’t stopped, Saudi crown prince says.” CNBC: https://www.cnbc.com/2019/09/30/oil-will-hit-unimaginably-high-prices-in-event-of-war-with-iran-mbs.html