The US and the UK are targeting Iran-backed rebels in the Red Sea; the Suez Canal has become a no-go zone for international commerce and Israel’s war against Hamas in Gaza is grinding through its fourth month of devastation. Over at Filthy Lucre PLC, the traders are drowning in champagne – the good oil days of Desert Storm are back. Except that they’re not: for international oil and gas prices it is business as usual. If you’re baffled by this, you’re in good company. Andrew Bailey, Governor of the Bank of England, said last week, “…from an economic point of view — if you take the oil price, which is an obvious place to look — it hasn’t actually had the effect that I sort of feared it might.”

Even so, President Joe Biden said that he was “very concerned” about the effect [of instability in the Middle East] on oil prices and added, “that’s why we’ve got to stop it.”

It’s no surprise that Biden feels this way. His battle against Donald Trump now rests apparently on persuading people that Bidenomics is a thing, a success and that it is under threat from Trump but Biden will know that a renewed bout of inflation will kill that strategy stone dead. 

However, as things stand today, both Biden and Bailey have nothing to worry about: at the time of writing, Brent is trading at $79/barrel. This is lower than it has been for almost all of the past six months, which included a brief high of $97/barrel at the end of September 2023. The days of $100 oil, which at one point seemed as if they would go on forever, seem far behind us with that level only tested once (in 2022) since the first half of 2014. (In passing, someone will, one day, write a history of the autumn 2014 oil price crash which has had some very profound economic effects most of which have been missed).

So what’s going on? Most importantly, oil markets are about fundamentals. Even if the oil price had spiked due to Middle Eastern unrest, the spike would have unwound itself pretty quickly as the market adjusted. Geopolitically-driven spikes in the oil price are like snow in June: they melt away fast as the fundamentals assert themselves. 

In this case, the fundamentals are clear: there’s usually plenty of spare capacity in the system at this time of year as Americans and Europeans hunker down for the winter – driving season in the US from May to September is a massive drive of global oil demand; global demand is slowing as interest rate hikes finally begin to bite and slow economies down; OPEC and its allies have a very good handle on the demand-supply balance right now. If the action was to switch from the Gulf of Aden to the Persian Gulf, it’s possible that the situation could change but, again, this would be short-term.

As we have seen with European demand for Liquified Natural Gas post-Putin’s invasion of Russia, the market has simply moved to new sources and with no negative effect on the price at all. It’s not right to say that the world is awash with oil but there’s plenty of it to go around right now: after all, for almost all of the past three years, the price has hovered around $80/ barrel and that, it turns out, is a price that suits everyone, including OPEC.

But maybe there’s another factor at play and one that’s staring us in the face. The International Energy Agency has just published its 2023 review and the statistics are extraordinary. The world added 500 GWs of renewable energy capacity in 2023 – the equivalent of over 10 UK National Grids – and is double the capacity that was added in 2022. In 2020, one in 25 cars was electric; this figure is now one in five. More than $1 billion per day is being spent on solar energy while the cost of solar PV modules dropped 50% in 2023, albeit off a high base. 

Carbon Brief noted in their analysis of the IEA’s report that, “Over the six-year period 2023-2028, an additional 3,684GW of renewables is expected to come online under the IEA’s “main” forecast. This is double the current total of renewable capacity installed globally.” No wonder then that the IEA has been talking about peak fossil fuel usage occurring within the next five years; no wonder too – perhaps – that the oil market is just beginning to ponder when the music might stop. 

Write to us with your comments to be considered for publication at letters@reaction.life