When the West Asia war started in February and Iran subsequently shut traffic through the Strait of Hormuz, analysts described it as the biggest ever oil shock in the history of capitalism. Oil prices did not support the doomsday predictions. Even in nominal terms, oil barely touched $120 per barrel (it had been higher when the Russia-Ukraine war broke out in 2022) and, in real terms, prices were well below the historic peaks.
In hindsight, we know why this happened.
When the West Asia war started in February and Iran subsequently shut traffic through the Strait of Hormuz, analysts described it as the biggest ever oil shock in the history of capitalism. Oil prices did not support the doomsday predictions. Even in nominal terms, oil barely touched $120 per barrel (it had been higher when the Russia-Ukraine war broke out in 2022) and, in real terms, prices were well below the historic peaks.
In hindsight, we know why this happened. China curtailed its oil purchases and drew down from its strategic reserves. That buffer is unlikely to cushion energy markets today. And the supply-side shock has increased significantly with Iran-backed rebels in Yemen taking control of the Red Sea Corridor and allegedly destroying the East-West pipeline in Saudi Arabia, both of which are crucial networks to ship Saudi oil if Hormuz remains shut. Oil prices have surged significantly in the last two weeks and could go even higher if these chokes are not eased.
Unless there is a meaningful resolution of the situation in West Asia, the oil shock to global markets is here to stay and will only accentuate. Countries, rich and poor, oil-importing or exporting, contrary to what Donald Trump believes, will pay the price. Fuel prices have gone to a record high in the US ahead of the crucial mid-term elections. India is yet to hike fuel prices, but the buffer against not doing so might wear out soon.
What will it take to solve the problem? Right now, what is happening is a war of attrition between the global energy markets and Iran’s ability to survive the costs of war, sanctions, and its squeezed oil revenues, thanks to the US naval blockade. While the Trump administration could continue with its bravado — there hardly seems to be a strategy here — countries in West Asia are beginning to show signs of looking for some sort of détente on their own.
The discussions between Iran’s president and UAE’s leadership on the sidelines of the BRICS summit and a proposed meeting of West Asian countries at Oman’s initiative are some such signs. Such efforts have been catalysed by otherwise absurd fallouts such as Qatar having to buy gas from the US to fulfil its supply obligations. Any such solution, if it were to emerge, will be a welcome development for energy markets, and an ominous sign for the US in the region.
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