Oil energy factors Q4 2023
Notes on geopolitical, economic, and environmental factors that shape the global energy outlook in short and medium term.
1. Israel-Gaza Conflict Triggering Broader Regional Conflict & Oil Supply Implications:
The ongoing conflict between Israel and Gaza has engendered concerns about a potential escalation that could trigger a broader regional confrontation. This escalation could significantly impact the supply of oil, with prices predicted to soar beyond $150 per barrel if the conflict engulfs other Middle Eastern nations, reminiscent of the price shocks witnessed in the 1970s1,2.
In a severe disruption scenario akin to the 1973 Arab oil embargo, the global oil supply could shrink by 6 to 8 million barrels per day, spiking prices initially by 56% to 75%3.
The oil markets remain susceptible to rapid flare-ups if the conflict spreads across the Middle East, keeping many economies on edge due to their dependence on oil imports from the region4.
2. Impact on Key Middle Eastern Producers:
The conflict's ripple effects could extend to key oil-producing nations such as Saudi Arabia, Qatar, Iraq, and Iran. Although the Middle East's significance in global oil exports has diminished over the years, it still accounts for approximately 30% of the world's oil supply5.
An escalation could potentially reduce the supply of crude oil, driving prices higher6. For instance, retaliatory actions could risk the closure of strategic passages like the Strait of Hormuz, a crucial channel for global oil shipments. A closure could propel oil prices above $250 a barrel due to its critical role in oil exports, especially from Iran7.
Amidst the conflict, Saudi Arabia pledged to stabilize the oil market, which momentarily eased supply concerns, highlighting the region's pivotal role in global oil market stability8.
3. Russia's Involvement:
The current situation has also spotlighted Russia's position. Observers noted the Moscow-Tehran axis's potential involvement following Hamas's attacks against Israel, suggesting a deeper geopolitical play at hand9. Russia, aligning more closely with Iran, could further foment chaos in the Middle East, pursuing their geopolitical objectives, and affecting the oil market dynamics10,11.
The expansion of the conflict to include Hezbollah or Iran could trigger a ratcheting up of sanctions enforcement on Iranian oil exports, further complicating the global oil supply scenario12.
4. Global Recession in China, Europe, and the U.S.:
A recession generally leads to a reduction in oil prices due to diminished demand. However, in exceptional circumstances with a tight global oil market and robust global oil demand, the impact of a recession on oil demand could be less pronounced13.
Oil prices can plummet significantly in the face of global recession fears and weak oil demand, especially in large economies like China14.
Economic growth is a major driver of crude oil demand, as growing economies have a higher demand for energy, especially for transportation needs15.
A recession could also deter oil companies from investing in new supply projects, potentially leading to supply shortfalls in the future16.
5. Role of Other Oil Producers:
In a scenario of a large disruption comparable to the Arab oil embargo in 1973, the global oil supply could shrink significantly, driving up prices and possibly leading to increased demand for oil from other producers outside the Middle East17.
The U.S., for instance, has reached an all-time high in oil production, which could potentially help in alleviating global oil supply concerns to some extent18.
6. Commodities Price Instability and Energy Transition:
The electric vehicle (EV) revolution has brought about a golden age for battery raw materials like lithium and cobalt, whose prices have surged dramatically over recent years19.
Around a third of the cost of electric vehicles is accounted for by battery material costs, and surging prices of these materials could potentially raise EV prices in the long term20.
The cost of a battery contributes significantly to the cost of an EV, and rising commodity prices could hinder the growth of the EV sector, especially if paired with unclear subsidy policies21.
7. U.S. Fiscal Challenges and Electric Car Subsidies:
Fiscal challenges in the U.S. might lead to a hiatus for tax credits making EVs less affordable, at least temporarily, which is against the goal of transitioning Americans away from internal combustion engines22.
Proposed legislative measures like the Driving America Forward Act aim to extend electric vehicle subsidies, indicating ongoing efforts to promote EV adoption despite fiscal constraints23.
The expiration of federal subsidies could significantly increase the price of electric vehicles, making them less affordable for a majority of consumers24.
8. Nuclear Power Implementation in Europe and the U.S.:
European regulators have proposed the inclusion of nuclear power alongside renewables to help reduce greenhouse gas emissions, aligned with the EU's commitment to achieving carbon neutrality by 205025.
Nuclear power accounts for about a quarter of the EU's electricity, playing a crucial role in the energy mix of 13 of the 27 EU Member States, representing a low-carbon alternative to fossil fuels26,27.
Despite being a major source of low-carbon electricity, nuclear power is facing challenges, with its share in global electricity supply possibly diminishing due to various factors including public opinion and safety concerns28.