How Oil Markets Are Responding to Uncertainty in the Middle East

Guest

Helima Croft and Javier Blas

Transcript

Helima Croft: When oil was not at risk in the immediate aftermath of that horrible attack on October 7th, I think a lot of market participants were like, “Okay, I’m not going to worry about this until something happens that materially impacts supply.” And what I think is interesting is I used to think that oil was a leading indicator of unrest building in the system in the Middle East. But now I would say sometimes, is it potentially a lagging indicator or is it a broken barometer, the oil price, for assessing the geopolitical tensions that are rising in the region?

Jason Bordoff: Escalating tensions between Israel and Iran, the world’s seventh-largest producer of crude oil, have fueled concern over oil price volatility for the past several weeks. But the oil market’s not reacting to geopolitical tensions in the Middle East as dramatically as it might have in the past. Despite an ongoing war in Gaza and Israel, Israel’s attack on Hezbollah and attacks by Houthis in the Red Sea, the price of oil has only been modestly affected. China’s slowing economy and the United States’ increased domestic production of oil are among many factors exerting downward pressure on prices, at least for now. Still, renewed fighting between Israel and Iran has left oil markets facing increasing uncertainty. If a regional war breaks out, it could drive prices up. And a dramatic change to the oil market will have a major impact on the global economy.

So given the current tensions, what’s the likely scenario? How will the oil market respond if there are attacks on energy infrastructure? How high could the price of oil go? And what is the state of energy markets today?

This is Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I’m Jason Bordoff. Today on the show, Helima Croft and Javier Blas.

Helima is managing director and head of Global Commodities Strategy and Middle East and North Africa Research at RBC Capital Markets. She joined RBC Capital Markets from Barclays where she was managing director and head of North American Commodities Research. Prior to that, she worked in Lehman’s Business Intelligence Group, the Council on Foreign Relations and the CIA where she focused on geopolitics and commodities.

Javier is an opinion columnist for Bloomberg covering energy and commodities. He was previously at the Financial Times where he held various positions including Africa editor and Commodities editor. Previously Javier reported on the international economy for Expansion. Javier’s co-author of the 2021 book, The World For Sale: Money, Power and the Traders Who Barter the Earth’s Resources.

We recorded this interview yesterday, so it’s hot off the press. I ask Helima and Javier to talk us through the current state of oil markets and the scenarios and uncertainty that lie ahead. I hope you enjoy the conversation.

Helima Croft, Javier Blas, two good friends, thank you so much for joining us once again on Columbia Energy Exchange to explain what is happening in the energy world and the Middle East to us. It’s good to see you both.

Helima Croft: Thank you for having us.

Javier Blas: Thank you for having us.

Jason Bordoff: So as I said, I wanted to have you both on because I’ve learned so much from both of you about these issues of developments in oil markets, what’s happening in the Middle East, and you’re such close observers of this. We’ve been chatting in recent weeks about everything that’s happening.

And so just for listeners who may not be paying quite as close attention, maybe Helima I’ll start with you, explain where we are. We’ve seen oil prices rise roughly $10, come off a little bit in the last couple of days over the last month or so. What’s happened in the last several weeks in oil markets? What are the competing forces right now pushing prices up or maybe pulling them back down?

Helima Croft: So Jason, if we wound the clock back several weeks ago, I would say it was a market that was really looking past geopolitics, largely looking past the ongoing war in the Middle East and essentially focusing on broader concerns about demand outlook, principally Chinese demand, concerns about oversupply into 2025. And so it was a market that was looking quite shaky for next year.

And yet we had the resurgence of geopolitical concerns in the past two weeks. And I think where the market really is right now is in watch and wait. Waiting to see what the potential Israeli response will be to the Iranian ballistic missile attack that targeted Israeli cities. And so the question I think for market participants is, are we going to see something that looks like April where essentially you have an Israeli response that allows Iran to essentially say, “Okay, this chapter is over”? Or do we see something much more serious, more in line with what we’ve been seeing frankly in Lebanon, the kind of escalation, and is that the catalyst for a broader back and forth between Iran and Israel that potentially puts some regional oil supplies at risk?

I think for the first time people are starting to think about is there a risk to Iranian oil supplies? And President Biden seemingly signaled that that could be on the target list. I think that really woke up a number of market participants. And everyone started googling Kharg Island to say, “Is there a potential concentration risk with that island that if you had some type of attack there, you could have some significant disruption”? So I think everyone is holding their breath to see what transpires in the next couple of days in terms of an Iranian response.

Jason Bordoff: And just so people listening know, I think you were referring in that reference to Biden to this moment, I forget when, a week or so ago, when he was walking to Marine One helicopter at the White House, was asked about the potential to strike oil targets in Iran. And made some comment like, “Well, we’re talking about that among lots of other things with Israel.” And people in the oil market reacted by thinking this really was an option on the table. Is that right?

Helima Croft: Yes. Again, I don’t think market participants were really taking on board the potential that you could see Iranian oil facilities attacked. You had had some discussion in the background I would say in the last month or so about the potential for some type of strike on Iranian oil facilities. But nobody was really starting to price in that probability I think in a meaningful way until President Biden seemingly signaled that these facilities were on the potential target list for Israel.

Jason Bordoff: Javier react, you should both react to what the others said and keep this interesting, make my job easier, people want to hear from you two, but react to that. And also at the same time that people are remembering there’s geopolitical risk to oil supply, it’s also the case that we’re seeing drones and missiles falling over countries in the Middle East and oil prices are less than $80. So maybe, that’s striking in and of itself that we’re not seeing a bigger reaction perhaps.

Javier Blas: One of the things that, to me, following on what Helima was saying of how the psychology of the market changed so much the moment that Biden spoke. And it was a bit of a muddled comment, he didn’t finish his sentence, so he left everyone wanted to know more of what he thought about the option of Israel striking the Iranian oil fields.

But in any other crisis over the last 10 years or so in the Middle East, we have speculated whether oil supplies were at risk. And it was a speculation and that dropped prices, et cetera, et cetera. This time we were not speculating, the President of the United States told us that there was a live discussion of whether Israel will attack, should attack, wanted to attack Iranian oil fields. That was a confirmation they are thinking about it. It doesn’t mean that they’re going to do it. But there was a confirmation that they were thinking about it.

So much that I think that the White House saw the impact of the comments in the market. And immediately a day later, they tried to walk back a bit of the comments. And President Biden said, “I think if I were in their shoes, I would be thinking about other alternatives rather than striking the oil fields of Iran.”

But then again, the US was seen by the oil market as pushing against Israel. So it has to be a very serious threat to the oil fields when the President of the United States have to go to the podium of the press room in the White House and say, “Hold on one second, we don’t think that this is a very good idea.”

And perhaps the biggest surprise is, you have said to me a number of years ago, what will happen to the oil market if whoever is at the White House 10 years from now announce that there is a live discussion about striking Iranian oil fields? And certainly my reaction would not have been, oh, WTI goes up to $75, because it will have been a lot higher. And that to me is a big change in the oil market. It’s an oil market that, yes, has rallied $10 but is still taking the geopolitical risk with a lot less, what’s the word here? The previous time the market took a worst-case scenario, and it’s almost sure that it’s going to happen. And this time the market is taking it, “Well, this may happen, but let’s put things into perspective.”

Jason Bordoff: Helima, do you agree with that? And what do you attribute it to? Is it Chinese economic turmoil? We’re all going to be driving EVs soon so no one cares about oil anymore? Or we haven’t seen supply disruptions in a while, people forgot what those look like?

Helima Croft: I’m a hundred percent with what Javier said. I think the real change, if you go back, when some of us started in the market, just the mere thought of an Israeli strike on Iran would send prices higher. That was the worst-case scenario.

But I think there are a couple of things. I think you can roll back the clock to 2019 where we had Abqaiq struck, the world’s largest oil processing facility in Saudi Arabia. That was always, for a lot of us who grew up in the US government looking at threats to oil supply, everyone was like, Abqaiq is a mothership, if anything happens to Abqaiq, it’s the worst thing in the market. And yet Abqaiq was hit and production was restored.

And I think people since then are like, “Well, the worst happened, I’ll see it when I believe it.” And then we got to Russia-Ukraine, and we had that really big run-up, remember we were at CERA together actually, Jason, in the midst of that, and people were talking about a potential multi-million barrel a day disruption.

Jason Bordoff: And the Biden administration released 180 million barrels of oil.

Helima Croft: A hundred percent.

Jason Bordoff: From the SBR to deal with that expected disruption.

Helima Croft: And also the way we did sanctions policy, to give exemptions, to carve out exemptions for energy transactions when we were sanctioning the central bank or disconnecting Russian bank from the Swiss payment system. We did price caps in part to keep Russian oil on the market after the EU passed the six-package of sanctions with the services ban.

And so people who bet on higher oil prices because of the Russia-Ukraine war really got burned. And so I think a lot of market participants after October 7th were looking to see some type of pathway to this involving Iran. And when that didn’t materialize, when oil was not at risk in the immediate aftermath of that horrible attack on October 7th, I think a lot of market participants were like, “Okay, I’m not going to worry about this until something happens that materially impacts supply.”

And what I think is interesting is, I used to think that oil was a leading indicator of unrest building in the system in the Middle East. But now I would say sometimes, is it potentially a lagging indicator or is it a broken barometer, the oil price, for assessing the geopolitical tensions that are rising in the region?

Jason Bordoff: I just want to say for those listening who may not know the reference to Abqaiq, this was I think five years ago when the Iranians struck a major oil facility in Saudi Arabia, disrupted around five million barrels a day. And to Helima’s point, that came back online a lot faster than people thought. Go ahead, Javier.

Javier Blas: There are two things that also I believe that they have changed in the market compared to, at risk of showing my age, to disruptions of say 10, 20 years ago. One is the development, the liquidity on the options market. This is a corner of the market that allows traders effectively to buy insurance in case prices do something like prices just skyrocket to a hundred dollars. But doesn’t mean that you need to take a position, you could just buy the insurance. So the impact on prices is not nearly as important. This market has really grown in size and liquidity over the last 10 years. So that has changed how the oil market today is hedging the risk compared to 10, 20 years ago.

The other one that to me is very important is the fog of war is a bit thinner today that it was 10, 20 years ago. You think about how we were measuring 20 years ago the flows from the Middle East, it was almost binoculars at hand, having agents in the ports of the Middle East counting oil tankers leaving and trying to determine how much crude was inside. Looking at how low they were sitting on the water, the lower they were on the water, the more oil they were carrying, et cetera, et cetera.

Today we have satellites, we have tracking, we have a lot more information, almost in real time. You don’t need even to pay for a commercial satellite picture, you have free satellite pictures of Kharg Island every three days available on websites of the European Union with very high resolution. You almost can determine which oil tanker is loading the crude. That also allows traders to trade more on information and less on rumor. And typically that means that prices don’t go as high as in the past.

Jason Bordoff: Helima, were you going to respond to that?

Helima Croft: The only other thing I would add, again, just showing our age, is the growth of US production. I remember in the run-up to the US invasion of Iraq in 2003, you would have supply disruptions out of Venezuela and out of Nigeria, which could be very, very impactful. It wasn’t just Middle East disruptions we were concerned about. I remember at my old job when there was a coup in Sao Tome and that caught the attention of the White House because they were concerned about the stability of all suppliers after 9/11. But I think US production also just changed the game in terms of geopolitical risk, supply disruption risk. And if we would wind the clock back, imagine if we were in a 2005/2006 moment and you had this kind of situation, people would be a lot more concerned I think than they are now.

Javier Blas: To add to that, Helima, 2006, last time that Israel invade southern Lebanon, the US net imports were running almost at a record high of 12 and a half million barrels a day. That’s net imports of crude. Today, the US on a net basis is exported about 1.5 million barrels a day. Yes, doesn’t mean that you have independence on energy because you are an exporter, you still are exposed to the international price of oil. But the psychology of the market, everyone in Houston, New York and Washington think very different about the oil market when you are exporting crude rather than importing 12 and a half million barrels a day.

Jason Bordoff: First, this is great, you guys should have your own podcast, because I don’t have to do anything, you just go back and forth, which I love. But I’m glad you explained that, Javier, because I was going to ask you, it is a global market, and in a sense doesn’t matter if you’re importing or exporting because you’re still exposed to a global price. And what matters is the state of the market when that disruption happens for the global price, which does affect the price at the pump, again, whether we’re importing or exporting.

So I want to talk about what might happen in the Middle East, what those scenarios might mean particularly for energy markets, which we’re here to talk about, of course there’s a number of other risks to human life and the devastation that’s happening in the Middle East, but I want to focus on energy markets here.

But the context in which this is happening, where are we in the oil market today? There’s a lot of discussion and debate between how OPEC thinks about things or the International Energy Agency thinks about things. We’re talking about shifting to electric vehicles and moving maybe away from oil. What do things look like today in terms of inventories, balances, the outlook for supply? There’s a lot of spare capacity or a reasonable amount. What do things look like today? And then that will affect I think how we might think about the potential for any disruption to impact markets. Maybe Helima could give a little bit of a sense of where we are.

Helima Croft: I almost want to pick up your issue of spare capacity because I do think that that is something that is also putting a check on a breakout in terms of oil prices. Because remember periods where we’ve had these really big run-up in prices, we’ve also had a pretty thin spare capacity buffer. And right now when people are assessing this situation, they’re looking at significant volumes of OPEC barrels that are off the market. And the question is, if you were to see some type of disruption in the Middle East, how quickly could those barrels come back?

And one of the issues that was putting a downward pressure on prices was this plan that was announced in June of OPEC to start phasing in, or OPEC+, the voluntary cuts. And the discussion before this latest round of unrest in the Middle East was really around would Saudi Arabia potentially bring back the million barrels faster than this plan announced in June because of issues with lack of compliance within OPEC?

And two countries in particular, Iraq and Kazakhstan, are the targets of a pretty tough effort to get compliance and get these two countries to show that they’re going to come into conformity. And so that had been weighing on sentiment as well. The sense that come December one, if you couldn’t get Iraq and Kazakhstan in line, and Javier has written a lot about this, you could see potentially a million barrels coming back quickly and potentially prices falling to 50. So that was the backdrop. Even there were lots of issues around demand as well. But that was the sort of, I would say the geopolitical issue I was getting most involved in. The discussion about what would be the timing of the return of OPEC barrels before we got to the situation we’re looking at now.

And if we were to see some type of scenario where either Iranian facilities were hit or Iran, after this attack, this coming attack that we’re expecting, tries to internationalize the cost by hitting someone else’s facilities, I think the real question would be, what would be the conditions under which this OPEC spare capacity would come back into the market?

And certainly the White House I’m sure would make the call, that Jason you’ve been involved in making, to try to get barrels from Saudi Arabia if we do see some significant run up in prices as a result of what’s coming from Israel.

Jason Bordoff: And just to make sure, again, everyone listening sees the background you’re providing there. In a market which has reasonably good supply growth, demand may be a little bit weaker because of what’s happening in China or elsewhere. OPEC, particularly Saudi Arabia with some others as well, but mostly Saudi Arabia, had voluntarily cut production. And there was a plan to put that supply back into the market because people want to sell oil, they want to make money from it.

But the question is whether the market actually needed that. And if other countries did not do what they were supposed to do with this agreement to restrict production, there was speculation or the possibility that Saudi Arabia might bring oil barrels back faster to try to enforce compliance by other countries with their production cuts and make sure they were not carrying the burden by themselves, which is something we’ve seen in the past. So I think that’s the landscape you were describing.

Javier, do you agree with that? And what does that mean for what the market looks like today? Is the possibility of strikes on energy supply, whether it’s against Iran or how Iran might retaliate, is that coming in a market that’s very oversupplied and it doesn’t have that big an impact? Or is it going to have potentially an out sized impact because markets are tighter than we think?

Javier Blas: I absolutely agree with the landscape as Helima described it. I think that if we look at from here until the end of the year, it’s very difficult to forecast where oil prices are going to go because to nail it, you need to get everything, strictly speaking about the oil market, every barrel of oil, whether it is on the supply or on the demand side, you need to nail it. But then you need to get three other important factors right to know where the oil price is going to be. And I’m sorry I don’t have a crystal ball for these three.

They are, you need to know exactly what Israel will do in retaliation and how Iran will respond to that retaliation. Whether it’s going to be a retaliation of the retaliation or is just one over, and everyone agrees that for now they have all climbed a step on the ladder and they stop there. You need to get that right.

Then you need to get right what the Chinese authorities are going to do with their economy and whether they’re going to just go whatever it takes to re-accelerate economic growth. Because a lot of the weakness that we see in oil demand in China is not as much related as a shift to electric vehicles, that certainly is not helping gasoline consumption, but what really is dragging oil demand right now in China is just a general slowdown and general economic slowdown in the Chinese economy, particularly in the construction sector. And that’s where we see really the weak point of oil demand right now around the world is on diesel, which is the fuel of the industrial sector. So this is not as much as the EVs, but it’s about economic stimulus and manufacturing, et cetera, et cetera. And I don’t know either what the Communist party in China is going to decide.

And the third element, and you are a lot closer to the action there than I am because I’m sitting in London, is who the American people are going to put in the White House. You also need to nail that one. And again, I may have my political preferences, but I don’t have a crystal ball that I bought on the American elections. You need those three elements to know where the market is going to go.

Jason Bordoff: Explain why the last one affects where the market goes.

Javier Blas: Well, because I think that, based on historical experience at least, if Trump was elected president, probably he will go harder on Iran. We may go again to enforcement of American oil sanctions, again Iran. That could reduce Iranian oil supply significantly. I think probably under Kamala Harris it will be more of the same that we have seen with the Biden administration, although that’s a question mark also. But I think that that will be the biggest difference.

I don’t think that either is going to restrict in any way or accelerate in any meaningful way the US oil production or the US petroleum industry. But I think it’s more about what they would like to do with Iran, more sanctions, less sanctions; with Venezuela, more sanctions, less sanctions.

And let’s not forget, because right now Iran and Israel and Gaza and Lebanon are occupying us, but who is on the White House in 2025 may also determine how the conflict between Ukraine and Russia, or vice versa better put, continues or stops. And that could also add more barrels of oil into the market or restrict barrels. So who is on the White House is absolutely critical to nail the 2025 oil outlook.

Jason Bordoff: And just to make sure I heard what you were saying. You view a Trump election as bullish for oil prices, despite promises to bring prices down for Americans and unleash American oil production, because he would potentially bring more Iranian oil barrels off the market?

Javier Blas: Yeah, ironically, President Trump talks about bringing prices down, but you look at all his major foreign policy initiatives, particularly in the Middle East, everything to me says higher prices.

Jason Bordoff: Helima, can I ask you about how you see … where do things stand now with Israel and Iran, and to what extent are you expecting a very large Israeli response versus one that tries to say, “Okay, let’s put an end to this”? And if it was more significant, and I think many are expecting a significant response from Israel, do you agree with that? And do you think it’ll target energy infrastructure and what might those energy targets look like?

Helima Croft: I love that question. I’m going to quickly jump on board the Javier comment though about Trump and Iran because I think that’s important. It’s a good segue into the discussion of where we are now. I do think what’s going to be interesting about President Trump is the question about, remember we had 2018 where we pulled out of the JCPOA nuclear agreement, and we asked Saudi Arabia at that OPEC meeting, Javier and I were both in the basement in Vienna for that meeting, where we put pressure on Saudi Arabia to increase production by a million barrels. And there were a number of other countries that did not want to actually increase production before they knew what the actual sanctions effect would be.

But the Saudis went ahead. And this meeting, I remember in the basement where Khalid Al-Falih was like, “It’s going to be a million barrels and we’ll do it alone if necessary.” And then you fast-forward to October, and I was actually at Bloomberg’s offices in London, I think I had been with Javier and his colleague, Grant Smith, and we issued seven exemptions for importers of Iranian oil, and prices collapsed. And a number of countries in the Gulf believed that they had been not exactly told the true US intentions when they put the barrels on the market.

And so I do think the question is going to be, if President Trump is going to enforce sanctions more strictly, because the sanctions are on the books, I don’t think you need new sanctions, but if you’re going to enforce these secondary sanctions, are you going to do it if you do not have a firm guarantee for a backfill? Are you simply going to tighten sanctions without clear promises from Gulf producers that they’re going to fill the gap?

And I’m not sure after what transpired in 2018 that countries in the region are going to rush and dump barrels on the market until they see how serious the Trump administration will be about enforcement. So I do think they’ll look for a backfill first. And the question is, are these Gulf countries in the mood to just start putting these barrels on the market before the policy is actually implemented? So it’s a TBD I think on that one.

But in terms of an Israeli strike, I think we just don’t know, Jason. That’s really, the Javier’s crystal ball I think is perfect because we don’t know. I was just in Washington, the discussion was that it’s going to be a significant strike. Clearly the Biden administration is hoping they can limit the scale of it, so it provides an off-ramp for Iran to say either, “Okay, we’re done or we’re going to do something that is symbolic but not escalating the conflict.”

But I’m not sure how much we are really in control of events because certainly what’s happened in Lebanon does not seem to have been … the Biden administration and the Netanyahu government don’t seem to be on the same page initially in terms of what was happening in Lebanon. So the question is, is this administration in Washington going to be able to really limit the target list in a way that provides an off-ramp? Or does the election timetable potentially present the Netanyahu government with an opportunity to essentially try to achieve everything everywhere all at once in terms of security aims, knowing that the US administration is likely to provide support even if they have concerns behind closed doors?

Jason Bordoff: And just to give our listeners a sense of what going after energy infrastructure in a big way would look like. How much supply would be disrupted, for how long, and for retaliation as well. Are you’re talking about mining closing the Strait of Hormuz or firing a missile at some processing facility somewhere? What’s the range of options out there right now?

Helima Croft: An option would be that would not be as disruptive for oil markets would be an attack, for example, on an Iranian refinery. So an energy target, something that is meaningful for the Iranian economy, but would not probably cause prices to run up in a significant way. That would be one type of energy attack.

I think the one that people are most concerned about, and Javier already mentioned it, would be Kharg Island, which 90% of Iran’s exports leave that island. There is a pretty important storage facility on that island. The Iranian Navy has an outpost on that island because it’s so strategically important. During the Iran-Iraq war, Iraq targeted tankers going to and from the island, they threatened to actually hit the terminal. So if you wanted to talk about where is there a site where there’s a lot of concentration risk for Iran, it would be Kharg Island.

So if you had some type of strike there that took off one and a half million barrels of Iranian oil exports, I think that would be the catalyst to move higher. And then the question would be, what would Iran hit in return?

Now, Iran has talked about Israeli energy assets, so are you going to be talking about attacks on gas facilities like Tamar, like Leviathan? But they’ve also said that any country in the region that provides assistance to Israel will be targeted as well. And so you almost then look at the flight map and you would say, “Okay, how would Israeli jets get to Iran?” One route would involve going over northern Iraq, so is Iraq potentially targeted? There are a lot of questions about what constitutes assistance.

And I think that will, again, we have a lot of contingencies if this happens and this, but when you want to think about the regional angle, I think a key ingredient to think about is what constitutes support for Israel? How does Iran judge that?

But certainly people look at the 2019 playbook and say, “Well, when the US did impose maximum pressure policies, they did hit tankers off of Fujairah, damaged them, didn’t sink them. There were drone attacks on key pipelines like the East-West Pipeline. And then there was that spectacular attack on Abqaiq. So people do look at the 2019 playbook.

But I’m sure Javier is going to discuss the fact that there are some differences on the diplomatic landscape in the region since 2019.

Jason Bordoff: Yeah, I’ll turn to you Javier. And also I’d love if you could touch on the issue, and maybe Helima you want to as well, on Friday the Biden administration announced some new sanctions targeted at Iran’s oil exports. Is that a small deal? Is that a big deal? Is that something both of you see as trying to signal this is how we’re going to go after Iran, but we’re working with Israel and there’s no more coming? Or is that the wrong way to look at it? Javier?

Javier Blas: No, I think that you have it right. I think that that’s the indication from the White House to the Israeli government, “Don’t go after the oil, we have other ways to do it that there are less disruptive and we can do this over time, we can again enforce the sanctions.”

As Helima said, the sanctions are there, they’re on the statute. It’s a question that either the United States has not been enforcing the sanctions or China and Iran have got various [inaudible 00:33:04] bypassing the sanctions and just making a bit of ridicule of the US Treasury and the US State Department. Which option is better for Washington? I leave it there.

But I don’t think that either are pretty good. But I do think that the sanctions can be enforced more tightly. And that if the international community, not only the United States, it’s also Europe, decides to bring Iranian oil exports down, they have the tools to do it without having to green light or turn a blind eye to Israel doing an attack as devastating as Helima indicated. Just wiping out Kharg Island will be just very, very devastating for the oil market. And also will create such a precedent that everyone will be worried about what’s next. You basically make all the worst-case scenario very much possible. And therefore the psychology of the market, I think it will change dramatically.

But going to what Helima was talking about, about the reaction of the Arab countries in the Persian Gulf, and above all Saudi Arabia but also Kuwait, United Arab Emirates and others. You look at where we were five years ago, there were no speaking times with Iran. There were almost no diplomatic relations between the two sides. And you look at today, and there have been a number of very high profile, very unusual meetings happening between senior Iranian diplomats and diplomats in the region from Arab countries. The Iranian foreign affairs minister traveled recently to Riyadh, a place that he doesn’t go that often. And not only he met with his counterpart, the Saudi foreign affairs minister, as you will expect, foreign minister to foreign minister, he was received in an audience by Crown Prince Mohammed bin Salman who effectively runs the kingdom’s affairs on a day-to-day basis.

And how the meeting was portrayed on the Saudi media, which is tightly controlled by the royal palace, there were pictures of the meeting. I would not say that they were smiling, but they didn’t look tense at all. It looked like it was a good meeting. The fact that the meeting was acknowledged, the fact that the wording of those news articles on Saudi official media was quite positive that the two countries were discussing. I think that the situation is very different to where we were five years ago.

And I think that there is, those countries led by Saudi Arabia, they know that they cannot really shape a lot of what is going to happen in the next few days and weeks. So they’re trying to get out of the situation the best way that they can. And I will not call it neutrality, but it almost looks like neutrality. They don’t want to choose between Iran and Israel, they don’t agree with either. And they’re basically indicating, “Please don’t get us involved in your fight. You want to fight, fine, but keep us out of the way.”

And I think that that has an important impact on the oil market because I think, and I emphasize think, or almost hope that it makes a all-out war, which every oil field in the region is in play and can be hit, a bit less likely that it will have been in 2019. Where you will have expected that the moment that Israel hits Iran, Iran hits Israel, effectively bombing the Saudi oil fields. I don’t think that we are in that situation anymore.

Jason Bordoff: Helima, can you talk a little bit about how you see OPEC thinking, particularly Saudi Arabia, relates to what Javier was just talking about, in different scenarios. So maybe given where the market is today, should people expect that the so-called tapering will occur where Saudi Arabia will bring oil barrels back into the market? How might that look different depending on whether other countries, particularly Iraq, are in compliance or not in compliance with the deal that people had agreed-to? And then if there is a significant disruption in Iranian supply, sanctions or an attack or something else, how would that change do you think the way the kingdom thinks about returning barrels to the market?

Helima Croft: Great question. I’m actually going to pick up a little bit on what Javier talked about in terms of that deal that Saudi struck with Iran to normalize relations in March of 2023. I’d actually been in the kingdom just days before that deal was announced. And I really saw it as part of an effort to de-risk Vision 2030. They were engaged in a very significant infrastructure build out. This is a very important priority for the Saudi Crown Prince, very much as part of delivering on a future for young Saudis with entertainment, leisure, lifestyle offerings. And having this very fraught security environment where you could wake up one morning and have an Iranian drone strike hitting your potential beach on the Red Sea, your resort, that was not palatable.

Especially when there was a view that you weren’t sure if the United States was going to come and assist you after what happened in 2019 with Abqaiq. When essentially the Carter Doctrine, which I’m sure you’re going to explain in a minute, was essentially invalidated. And so there were real concerns about what would the US commitment be to providing security for Saudi Arabia.

So I do think that the deal is holding. And the fact that we have not had, for example, the Houthis target Saudi infrastructure, which is very much in range. It’s in range for Houthi missiles to target, for example, the Jazan facility across the border. You’ve not had Aramco tankers deliberately targeted in the Red Sea.

And I have been told that there’s a view that Iran is essentially telling groups like the Houthis, “Hold your fire, we have this diplomatic agreement.” It’s not that Iran and Saudi are best friends or even close friends, but they have this detente.

And so the question is, if you do have a serious escalation in hostilities between Iran and Israel, will that detente hold? Is Saudi Arabia essentially immunized from retaliation?

I think it really just matters, what is the attack? I don’t think Saudi would be at the top of the target list. But does that deal that Saudi has, does that extend to everybody in the Gulf? Are there other facilities that, again, could potentially be targeted? Are there militias, Iranian-backed militias in Iraq that could target infrastructure there? Is everything safe just because Saudi is in a safer place than it was in 2019? Big uncertainty over that question.

And then the OPEC response question I think is really important because if we have a run-up in prices, let’s play out the scenario that we have either a significant attack on Iranian oil facilities or frankly a very significant military strike and a loss of senior personnel that causes the Iranians to retaliate against Israel in a way that triggers a harsh Israeli response, and we go into this retaliatory cycle, and we have a run-up in prices. Obviously the call will come to Riyadh. And the question is, how fast would Riyadh want to bring back barrels?

And I do think that there could be a hangover again from 2018 where not wanting to jump in front of a disruption until one materializes and until you know that it’s going to be of extended duration.

Jason Bordoff: And also just maybe being happy with another $10 or $15 increase in price before doing something about it.

Helima Croft: Right. Or also just not wanting to be seen as, Javier’s point I think is so valid, you don’t want to be in the line of fire, so you almost want to be like, “This is not our fight. We’re going to stand down on this one.”

And so I could see a scenario where they either bring some of the voluntary barrels back or they watch and wait. And so I don’t think they’re going to rush in and say, “Okay, we’re going to bring everything back. We’re going to abrogate this deal.” That extends, the actual collective cut extends through the end of 2025. I think they’re going to want to keep that intact.

But I certainly think there’s going to be pressure from the White House if we have this run up in prices for the Saudis to basically help extinguish that price fire. The question is, how quickly are they going to jump in front of this thing?

Jason Bordoff: Javier, give your take on that. And also if you could just, after you give your take on that, just people listening to this who may be thinking about November 5th, may be wondering how quickly changes in oil price show up at the gasoline pump, I’m wondering what we know about that?

Javier Blas: It can be quick, if the price, let’s put it this way, if the worst case scenario that Helima and I are talking, which is an attack, an Israeli attack on a major Iranian oil export terminal like Kharg Island, we are going to notice at the pump, if that happens, say, on a Monday, by Friday we are paying more at the pump. It will be as quickly as that because the price reaction will be quite severe.

But I just wanted to bring an extra point to what Helima was mentioning now, which I fully agree with her. And is what the Chinese will do if this escalates. Because obviously this is a global oil market and every important nation, exporting nation, it doesn’t matter, you are affected by the price of oil. But China is the largest buyer of Iranian oil, to the tune of around 90% of all the oil that Iran puts on the water today goes one way or the other to China.

And I do think that China will have a lot of interest to try to contain this. It has been interesting that we have beginning to see some signs of more Chinese diplomatic activity, with calls to the Iranians and the Israelis. It’s fairly small, but I detect the first signs that China has realized that if this ends involving oil is bad news for their economy. The last thing that you want when you are trying to increase economic activity is at the same time dealing with a significant increase in oil prices and also a direct effect because you are the buyer of those barrels.

So that will be something that I will be watching in the next few days because that could be also part of the different diplomatic initiatives and the pressure that different countries put to the different actors to try to contain the crisis.

Jason Bordoff: Just very quickly because we’re running out of time, but I just want to make sure, Helima, you described what you thought OPEC, again, particularly Saudi Arabia, might do if there’s a big disruption. But if there’s not, given where we are today, what’s your baseline for what happens with the return of barrels to the market? How is that affected by what other countries like Iraq might do with their compliance numbers?

Helima Croft: So what we know right now is that, and things often change, when you go into a meeting and there’s some shift and you end up in a different place than where you thought you were going to be six weeks out, but as it stands right now, the position seems to be, if we do not have better compliance numbers out of these two countries, Saudi Arabia will at their discretion, time of choosing start bringing those million barrels back. Now that doesn’t mean necessarily on December 2nd, it’s like here’s a million barrels, here’s 50. But just even the thought process behind Saudi Arabia has discretion, is just going to bring them back potentially faster, I think would exert negative pressure on prices.

But I still think that they will put some thought behind, even with independent agency on those barrels, they’ll put some thought behind how they want to bring them back. But that is certainly I think the argument that they are making and the rest of OPEC is making to these two countries is like, “Look, you can be in the situation now where you are above your production quotas by several hundred thousand, but if Saudi brings back a million and you’re staring down 50, you’re going to be in a worse economic situation than if you had just pulled back production.”

So we will have to see what this looks like in the next couple of weeks. But if we don’t get better numbers out those two countries, then I do think we need to start seriously thinking about a faster return of the million barrels from Saudi Arabia.

But I think what Saudi also … I think there’s a little bit of a frustration in Saudi Arabia with people saying, “Oh, they have a high fiscal break even, they have to keep propping up this market in perpetuity.” And I think their view is that they can cut spending, they can borrow, capital markets remain open to them, they have large foreign reserves, they have overseas holdings of their sovereign wealth funds, that they’re not as fragile, that they can’t endure a period of softer prices. I don’t think they like the perception that they have a high fiscal break even and everybody can be a free rider. So again, if these two countries don’t show better compliance, I do anticipate that the Saudis will bring it back faster than what they outlined in June.

Jason Bordoff: I want to follow up on that, but very quickly, we’ve talked about potential scenarios for significant disruptions for about 45 minutes now, and neither of you has mentioned the letters SPR. Does the Strategic Petroleum Reserve just not really matter anymore? It’s smaller than it used to be, but it’s still pretty big. Javier?

Javier Blas: No, I do think that it matters a lot. And obviously the timing will be very important. I think that an Israeli attack that disrupts the oil market a week from the elections will be met with a significant release of the Strategic Petroleum Reserves. A week after the elections, probably is completely different. You don’t have the same political factor, let’s be honest here.

But that to me is perhaps one of the others, and Helima alluded to this earlier, another big difference from the previous disruptions in the market has been also that the way that in particular the United States, but I think that other European countries, slowly have come along to the thinking in Washington. The thinking of how to use the strategic petroleum reserves across the country’s members of the International Energy Agency, those are the western countries, the industrialized countries, is different today than it was 10 and 20 years ago.

In the past, the doctrine of the International Energy Agency is, you wait, you wait until you really see the physical disruption impacting the market, when you really can see that we are losing barrels. By that time the damage has been done, the price has gone through the roof, and you have an inflation problem and an economic problem.

I think that the thinking now is you act a lot earlier, you do not need to wait until the barrels are lost, you could act on the perception of the loss of the barrels because that’s having an impact on prices. And also you are going to act too much is better than too little. So you go big. So that has also changed the way that the market sees things. Because the market is very aware that if there is a disruption, the US and his allies in Japan, South Korea and Europe will put a lot of barrels on minute one into the market. And if they think that we are losing 50 million barrels, they will put 150 just to make sure that we are immunized. And that to me changed completely how you play this market.

Jason Bordoff: Yeah, you can only do that so many times unless you also refill it, but maybe that’s a longer term issue.

Javier Blas: I think we need a second podcast to talk about the future of the SPR.

Jason Bordoff: Since this podcast is only audio, listeners can’t see your nodding and vigorous agreement, Helima, but it sounded like you agreed with what Javier was just saying?

Helima Croft: Again, I feel like this is a trip down memory lane for the three of us, we are showing our age. But I remember during the Arab Spring when there was the Libyan outage, and we released from the SPR. And at the time it was like, wow, we’re releasing and there’s no disruption to a US refinery. We have really changed the justification for releasing from the SPR.

And if you think about this administration, they were releasing from the SPR before the Russian invasion of Ukraine. There was actually a release, how many months was it prior to the invasion where we had a release from the SPR? But that was not … they were already releasing for price before that invasion. So I do think there has been a new novel … there’s a new Biden doctrine for the SPR. We’ve had it drawn on for different reasons, but I do think that this whole use of it for price is something materially different than we’ve seen in previous administrations.

Jason Bordoff: We were talking a minute ago, Helima, you were talking about Saudi Arabia may not really like the way people talk about their fiscal break even, and they have a lot of tools to weather periods of softness in the market. I just want to conclude by asking both of you how to think about the revenue needs, the fiscal situation of some of those large petro states? And whether this is just a period of cyclical softness, Chinese economy? Or how do you think about the medium to long-term with the energy transition that is gradually accelerating, oil demand is still going up, not down, but the idea that peak oil may be around the corner is held by at least some, and there’s quite a growing variance in opinions between some maybe in OPEC who see oil demand growth strong for decades to come and some who think it’s going to plateau much sooner.

It does seem like one important difference now. In the past, of course, oil’s always boom and bust, there were periods of cyclical downturns because of recession or pandemic. But in the long term you knew oil demand was going to be higher than today. That’s maybe not the case with quite the same certainty anymore. How does that affect the conversation we’re having? Maybe I’ll start with you, Helima.

Helima Croft: Well, I think what’s so interesting is that if you go to Saudi Arabia, they are making such interesting transitions. Certainly there’s been this big back and forth dispute with the IEA over demand and peak demand. But at the same time, you also see a country that is moving almost as fast as they can on the diversification track. And every time I go, the new talk is about AI and the fact that they believe that they have the best economics for data centers there. You think about Neom, again, some of that’s going to be slower obviously implementation because of the fiscal situation. But they are really talking about future-proofing their country.

In a way, it’s not that they’re saying that it’s the end of the age of oil, but they are … all the conversations are around future industries. And even when you think about what the energy ministry and Aramco are working on, they’re talking about hydrogen, they’re talking about the Saudi Green Initiative. So even the conversation in Saudi Arabia has evolved in a way that 10 years ago I just wouldn’t have thought would be where they are in terms of how they’re thinking about their future growth.

And think about the decision that they made not to increase maximum spare capacity by a million barrels and essentially saying, “Look, the tens of billions of dollars that we can save from that can be deployed for other projects that are better use for Aramco.” But they’re spending with a calculator now and they’re making choices about what their future society is going to look like in a way, again, that I don’t think we would’ve thought possible 10 years ago.

Jason Bordoff: Yeah, they had been, just again so people listening know, had been planning to spend tens of billions of dollars to increase their oil capacity, ability to produce oil, a million barrels a day, and then pulled back on those plans, which is what you were just referring to.

Javier, I’ll just ask you how this moment of uncertainty and of the outlook for transition and other uncertainties affects some of what we’ve been talking about for the last hour about oil geopolitics and how the responses to it might look different today than in the past?

Javier Blas: I always say that the most dangerous words, combination of words in global financial markets is ‘this time is different’. Because every time that you say that, you know are making a mistake, and it’s not, it’s cyclical, etc, etc.

But it does, at risk of tempting fate, it does feel a bit different. We are not talking, we can debate whether global oil demand is going to peak at 105, which is more or less where we are today, and 110, which is just a bit higher, or even going all the way to 120, even the most optimistic or bullish analyst, which probably is OPEC on oil demand, they see limited increase in oil demand going forward. Certainly it’s not a repetition of the past 25 years. So very strong incremental oil demand almost every year barring global financial crisis in 2008/2009 and Covid obviously in 2020.

So I think that that is a limiting factor for prices. But obviously we also need to keep investing in oil. I don’t think that even if oil demand stops growing, we are going to see a significant decline in consumption. So we are going to still need the industry to keep investing, to keep the supply that we need.

You look at how OPEC, and in particular Saudi Arabia are looking at this, they are trying to diversify. And I agree with what Helima is saying, you travel to Riyadh, it feels completely different every time. But also perhaps this is one of the worst possible times for them to face a downtown in prices. They’re at peak spending, they need to spend every year billions of dollars, because a lot of these projects are already on their way, so you need to finish them, so you need the money.

You have also started to flexibilize your political system. It’s not that they are going about and turn into a Western democracy, but the forces there in Saudi Arabia are demanding change, wishing to see more change. The moment that you start allowing some change, the floodgates are completely wide open. And you are going to have to keep up in bringing prosperity to the kingdom. You face also a really complicated demography with a significant chunk of the country under 35, even under 18 years old. And that means that they need money.

Can they cut the spending? Yes, they can. Can they borrow more? Yes, they can. They can do all of the above. But it does mean that down the line, Saudi Arabia needs higher not lower prices. So the pressure on the kingdom to achieve that policy is going to remain there.

Whether they can achieve that is an open question. One thing is that you need higher prices, you want higher prices. Another thing is whether you can achieve that. I would love that my employer pay me more, but that doesn’t mean that they’re going to do it. So they do face a critical test now. And I do think that they need the money. Can they weather it for six months, 12 months, 24 months? Most likely. But looking from today, and I’m thinking about 2030, Saudi Arabia certainly would like a higher oil price in 2030 than we have today.

Jason Bordoff: Helima Croft and Javier Blas, thanks so much. This has been a fascinating conversation. And again, we’ve intentionally focused narrowly on how to think about energy geopolitics, which is what we do every day here at the Center on Global Energy Policy. How in this particular conflict energy might be used as a tool or a target in war. What the impacts of that might be on oil markets or the geopolitical relations between Arab countries. But at least it’s worth repeating again, that the consequences, those seem small relative to the potential for loss of life and humanitarian suffering because of the violence and conflict we see in the Middle East. But it is important to understand the energy market impacts and the geopolitics of energy. And always learn a lot by having a chance to talk to both of you about it. So thanks again for making time to be with us.

Javier Blas: Thank you.

Helima Croft: Thank you, Jason.

Jason Bordoff: Thank you again, Helima Croft and Javier Blas. And thank you for listening to this week’s episode of Columbia Energy Exchange. The show is brought to you by the Center on Global Energy Policy at Columbia University School of International and Public Affairs. The show is hosted by me, Jason Bordoff, and by Bill Loveless. The show is produced by Tim Peterson from Latitude Studios. Additional support from Caroline Pitman, Lilly Lee and Kyu Lee. Sean Marquand engineered the show.

For more information about the podcast or the Center on Global Energy Policy, please visit us online at energypolicy.columbia.edu or follow us on social media at ColumbiaUEnergy. And please, if you feel inclined, give us a rating on Apple Podcasts, it really helps us out. Thanks again for listening, we’ll see you next week.

Escalating tensions between Israel and Iran, the world’s seventh-largest producer of crude oil, have fueled concern over oil price volatility for the past few weeks.

But the oil market isn’t reacting to geopolitical tensions in the Middle East as dramatically as it has in the past. Despite an ongoing war in Gaza and Israel, Israel’s attack on Hezbollah, and attacks by Houthis in the Red Sea, the price of oil hasn’t changed much. China’s slowing economy and the U.S.’ increased domestic production of oil seem to be keeping prices down… at least for now.

Still, renewed fighting between Israel and Iran has oil markets feeling nervous. A regional war could drive up prices, impacting the global economy.

In an interview recorded Monday, host Jason Bordoff talks with Helima Croft and Javier Blas about the current state of oil markets, and how global instability could impact their future.

Helima is a managing director and head of global commodity strategy and Middle East and North Africa research at RBC Capital Markets. Helima joined RBC Capital Markets from Barclays, where she was a managing director and head of North American commodities research.

Javier is an opinion columnist for Bloomberg covering energy and commodities. Javier is coauthor of the 2021 book “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”

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