The monthlong spate of attacks by Yemen’s Iranian-backed Houthi rebels on ships in the Red Sea has certainly spooked shipping companies, which have diverted vessels from the danger zone even as U.S. and British naval forces continue to hammer the Houthis with retaliatory strikes.
The monthlong spate of attacks by Yemen’s Iranian-backed Houthi rebels on ships in the Red Sea has certainly spooked shipping companies, which have diverted vessels from the danger zone even as U.S. and British naval forces continue to hammer the Houthis with retaliatory strikes.
What the relentless and escalating attacks haven’t done—surprisingly, in a place that accounts for about 12 percent of the transit of the world’s seaborne supply of oil—is rattle energy markets at all. After more than a month of ongoing rocket and missile attacks on all sorts of commercial ships in the Red Sea (nominally part of a Houthi campaign to punish Israel for its invasion of the Gaza Strip), London’s Brent benchmark crude oil price is actually lower than it was in early December, at around $78 a barrel. The U.S. benchmark price has barely moved since late November and remains around $73 a barrel.
For decades, the sanctity and security of energy flows in the waters around the Middle East have been considered the geopolitical tripwire for energy markets. Much of the energy that powers the world, whether in the form of crude oil or natural gas, either comes from the region or passes through tight waterways such as the Bab el-Mandeb, the chokepoint just west of Yemen that is the gateway to the Red Sea and thus the Suez Canal, or the Strait of Hormuz, another energy-intensive bottleneck on the other side of Saudi Arabia. There was a time when Iran could spike global energy prices just by threatening to make mischief in the Strait of Hormuz, let alone when it or its Houthi allies actually struck key Saudi oil installations.
Yet now, amid a widening regional conflict with actual and repeated attacks on commercial shipping, oil markets are nonplussed.
“There is a shopping list of headlines that, 10 years ago, would have sent shock waves through the market, and they are becoming a daily norm, and prices are barely blinking,” said Richard Bronze, a co-founder and the head of geopolitics at Energy Aspects, a research consultancy based in London.
What explains the lack of response from energy markets? There are, it turns out, a lot of reasons. For starters, the Bab el-Mandeb that the Houthis are making impassable is not the same thing as the Strait of Hormuz: The former is a convenient pathway to Suez and on to Europe, but it has alternatives, while the latter is a vital source and conduit of oil in its own right.
But more fundamentally, oil market fundamentals explain a lot of the blasé response. A year ago, with the Russia-Ukraine war raging, OPEC cutting production, and Russian oil under sanctions, the world expected a fairly tight oil market, meaning that supply might be hard-pressed to keep up with demand. Instead, it saw record-breaking oil production from countries including the United States, Brazil, Canada, and tiny Guyana; Iran, still laboring under U.S. sanctions, even added half a million or so barrels a day to global output.
“In reality, the market has more cushion than we bargained for,” said Matt Reed, the vice president of Foreign Reports, a Washington energy consulting firm focused on the Middle East. “Everyone had panicked about Russia, and in the end, 2023 was all about U.S. and Brazilian supply, and then the overlooked extra Iranian barrels.”
And that cushion has a name: spare production capacity. OPEC, the oil-producing cartel, kept cutting its own output in a vain bid to prop up prices. It didn’t entirely work, thanks to gushers elsewhere, but it had one beneficial side effect: OPEC’s—that is, mainly Saudi Arabia’s—spare production capacity is huge, with the ability to surge about 5 million barrels of crude a day if needed.
When it comes to pricing geopolitical risk, the amount of slack in the system—its spare capacity—is a giant shock absorber that reduces concern about current supply risk. (When oil spiked to record highs in 2008, Saudi spare production capacity was very low.)
At the same time, global demand for crude has not been as heated as expected, especially near the end of 2023. China’s post-pandemic thirst for oil lost steam later in the year, and global demand growth fell sharply. The International Energy Agency, in its latest oil market outlook, expects that trend to continue with healthy supply growth next year coupled with demand growth that will be half as strong as in 2023 due to economic headwinds and environmental considerations.
Furthermore, the Houthi campaign, as disruptive as it has been to commercial shipping lines such as Maersk that are now sailing container vessels around the south of Africa to avoid incoming rocket fire, has not so far targeted oil tankers or oil production facilities. Part of that is due to the truce between Saudi Arabia and Iran that has kept some of the world’s most important oil installations out of the firing line—unlike in 2019, when drone attacks hit two major oil processing facilities in Saudi Arabia.
“These are threats to regional transportation, not to production,” said Kevin Book, the managing director of ClearView Energy Partners, a Washington energy consultancy. “The China-brokered rapprochement between Tehran and Saudi Arabia—production could have been at risk, but we are in a different place, at least for now.” While some energy companies, such as Shell and BP, have re-routed their tankers to avoid the Red Sea, that just adds time and costs to the voyage—it doesn’t take the oil off the market.
“Latency in delivery is different than the loss of that energy,” Book said.
While the Houthi attacks seem scattershot, targeting vessels that have nothing to do with Israel, there is still a method to the madness, Reed said. The militants have so far been careful not to hit heavily laden oil tankers, which could create a huge environmental catastrophe.
“Most of the ships being targeted are dry bulk carriers and cargo ships, not tankers,” he said. “I think that’s deliberate. If they kill sailors, some countries will get upset. If they hit a tanker and cause an environmental disaster, the world will be outraged.”
The energy market’s insouciance over the past month doesn’t invalidate the old paradigm that prioritized the security of Middle Eastern energy flows. It’s just a reflection of a new world in which U.S. oil production, now more than 13 million barrels a day and rising, has simply changed the relative importance of what once were the very lifelines of Europe, the United States, and more recently, Asia.
“The rules of thumb that got thrown around for 30 years are not useful frameworks for how the market responds today,” Bronze said. U.S. shale oil has created more earthquakes than just those in heavily fracked communities. “There is less of a sense of dependence on imported oil.”
But things could still get worse in the region, especially given the ongoing efforts by the Biden administration to degrade Houthi capabilities and the prospect of direct attacks on tankers and other energy assets. Energy prices have shrugged off everything so far, but that could all change, especially if and as Iran steps up its efforts at regional escalation.
“I would say that the contagion and conflagration risk is underappreciated,” Book said. “If we get to a point where escalation becomes a production risk, and that is possible, then we could see a price premium.”
login
who are we?
contact us
qosheapp
Toi Staff
Gideon Levy
Belen Fernandez
Andrew Mitrovica
Mort Laitner
Nikkei Editorial
Rami G Khouri
Ali Fathollah-Nejad
visit website
