Why oil prices are steady despite events in Israel and Gaza
In a world of a lot of news, Reaction subscribers would be forgiven for having missed an interesting story from the last week: the acquisition of the oil company Hess by super-major Chevron for $53 billion. Hess has been around for 90 years having been founded by Leon Hess in North Dakota in 1933. His son, John Hess, the current CEO, has struck a deal that gives him and his family around $5 billion for their share of the company. Lucky old Hess family but what’s interesting is why Chevron have bought Hess and the answer lies, not in North Dakota, but in South America and the new oil Eldorado of Guyana.
Exxon found oil in Guyana in 2015 and started producing in 2020 and Hess has been a non-operating partner in these licences since the start. In time, it’s estimated that Guyana will produce, at peak, around 1.5 million barrels of oil per day providing a simply staggering windfall for this tiny country of just 700,000 people. It’s very hard to know, right now, whether this windfall will be good or bad for Guyana and its people but the world is watching: the US, UK, EU and others have beefed up their diplomatic presence in Guyana as they monitor what’s going to happen next and how the government of Guyana spends its spoils.
Next door to Guyana is the former Dutch colony of Suriname which has also found oil – not in quite the same quantities yet – but it too is on a journey of massive, petro-dollar driven change. And this corner of South America, hemmed in by the Amazon Jungle on one side and the Atlantic Ocean on the other, is not the only new face in oil: Namibia, which has a population of 2 million, has also joined the party after decades of unsuccessful exploration with Total making massive discovery in February last year. The oil being discovered in these three countries is also high-quality oil meaning it requires less complicated refining than the treacle-like oil that, for example, Venezuela sits on top of.
All this to say that there’s plenty of oil about and that’s well before we consider the almost endless reserves in the Middle-East and the fact that the US is largely self-sufficient when it comes to oil supply. This all goes someway to explaining why, when it comes to oil markets, there’s something we haven’t seen before when it comes to Middle-Eastern geo-political crises: an oil price that has remained steady despite the events in Israel and Gaza.
After Hamas launched its barbaric attack on Israel, we saw crude prices spike to their highest point this year but they came off this peak rapidly. In fact, this time last year, the price was $96/barrel, well above today’s price of $89/barrel. Admittedly $89/barrel is a high price: the US would like the oil price to be lower and the limits of the Biden Administration’s ability to influence Mohammed Bin Salman were laid bare earlier this year when OPEC reduced its oil production in order to spur higher prices. Yet it would not be a surprise if there was some disappointment in Riyadh that recent events haven’t pushed oil revenues up.
Global economic woes don’t help either: slowing Western economies will drag on the oil price no matter what the wider geo-politics suggest but there is a second half of the equation that may have been underestimated and will mean that Guyana, Suriname and Namibia need to get on with producing as soon as possible if they want to get the maximum financial benefit. The International Energy Agency (IEA) released its 2023 energy review earlier this month where they said, “the momentum behind clean energy transitions is now sufficient for global demand for coal, oil and natural gas to all reach a high point before 2030.”
The IEA is clear that this peak doesn’t mean the end for oil and gas: in fact, this is very much not the case. Hydrocarbons will still form the bulk of global energy supply but it suggests a momentum in clean energy that, as investment increases and technology consequently improves, will become unstoppable in the 2030s. As an example, the IEA predicts that as a result of Biden’s Inflation Reduction Act, 50% of new car sales in the US in 2030 will be of electric vehicles compared to 12% in 2021. No one needs to be told how tough things are globally right now but, if you look closely enough, there are reasons to be cheerful and, despite all its myriad complexities, the burgeoning energy revolution is one of them.
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