Three reasons why oil prices are remarkably stable

SHOULDN’T OIL PRICES be surging? War has returned to the Middle East. Tankers in the Red Sea—through which around 12% of seaborne crude is normally shipped—are under attack by Houthi militants. And OPEC, a cartel of oil exporters, is restricting production. Antony Blinken, America’s secretary of state, has invoked the spectre of 1973, when the Yom Kippur war led to an Arab oil embargo that quadrupled prices in just three months. But oil markets have remained calm, trading mostly in the range of $75 and $85 per barrel for much of last year.

There have been exceptions. Brent crude, a global benchmark, ticked above $85 per barrel last spring after OPEC+, a larger organisation which includes Russia, said it would cut production. When Saudi Arabia extended its production cuts in September, prices reached almost $100. The market rose again after Hamas attacked Israel on October 7th. Yet each time prices quickly returned to that $75-$85 range (see chart 1). Brent ended 2023 at $78, down $4 from the start of the year. There are three reasons why traders expect this trend to continue in 2024.

The first is supply—for years the biggest driver of price surges. Oil production is now less concentrated in the Middle East than it has been for much of the past 50 years. The region has gone from drilling 37% of the world’s oil in 1974 to 29% today. Production is also less concentrated among members of OPEC (see chart 2). That is partly because of the shale boom of the 2010s, which turned America into a net energy exporter for the first time since at least 1949. Growing output from non-OPEC countries such as Guyana, which produced record volumes of crude last year, is also helping to diversify supply. The International Energy Agency (IEA) reckons that new sources, along with increased volumes from America and Canada, will cover most of the growth in global demand in 2024.

Oil from Russia, the world’s third-largest producer, has continued to flow despite restrictions from the West, which in 2022 imposed a price cap of $60 per barrel on Russian exports of seaborne crude. Traders based in Dubai and Singapore promptly rejigged tanker fleets to send vast quantities of discounted oil through Indian refineries, changing established routes with astonishing agility. Russian oil is now widely traded above the West’s price cap. Yet in one respect, at least, the West’s policy has worked: the continued availability of Russian oil has helped prevent the dramatic surge in prices that many feared in 2022, when the EU banned imports of Russian crude after Vladimir Putin launched his full-scale invasion of Ukraine.

Another reason for calm is OPEC members’ ample spare production capacity (ie, the amount of oil that can be produced from idle facilities at short notice). When production is tight, as it was during the early 2000s, exporting countries have little room to respond to increases in demand. That can send prices soaring (see chart 3). Today the situation is different. America’s Energy Information Administration (EIA) estimates that OPEC’s core members have around 4.5m barrels per day of spare capacity—greater than the total daily production of Iraq. For now, traders are betting that OPEC’s cushion can soften the blow of the supply disruptions.

Finally, there is demand itself (see chart 4). The world still has a big appetite for oil: according to the EIA demand hit a record in 2023 and will be higher still in 2024, thanks in part to growth in India. But that is unlikely to push prices much higher. Global growth is not at the levels seen in the early 2000s. China, long the world’s biggest importer of oil, is experiencing anaemic economic growth. Structural changes to its economy also make it less thirsty for the stuff: next year, for example, half of all new cars sold in the country are expected to be electric.

Other climate policies will have a similar effect elsewhere. In the long term, the world’s move away from oil will ensure the market is more resilient to geopolitical shocks and production cuts, even if the transition is likely to be disruptive. Ukrainian drone strikes on Russian refineries recently pushed Brent above $85 per barrel for the first time since early November. For now, though, the price rise looks modest. It will take a lot to roil oil markets this year.■