Despite the ongoing ‘war’ — if one is ready to call it a ‘war’ and not a genocide — in the Middle East, oil prices have largely remained unaffected.

Last Friday, as the week approached its end, oil prices settled more than two per cent lower, with Brent crude futures down $1.92 or 2.3pc to $84.89 a barrel. West Texas Intermediate crude futures also fell $1.95, or 2.4pc to $80.51 a barrel. On a weekly basis, both benchmarks settled more than 6pc lower.

Two reasons are being cited for this softening of the oil markets despite the ongoing ‘war’.

The first is that the war has not spilled over. While neither Gaza nor Israel are any significant producers of crude oil, in the oil-producing Middle East, including Saudi Arabia, hardly 900 km from Gaza, life remains as usual. And despite some lip service, Iran, too, has shown little enthusiasm in entering the battle arena in any real sense.

Thus, there is little ‘war’ premium. There was a knee-jerk reaction in the immediate aftermath of the Hamas attack on Israel on October 7. But even then, the price spike was not too great, and that too was brief.

While the Middle East war has left oil prices unchanged, the world’s transition to clean energy may be the game changer

To be fair, with oil markets continuing to be ruled by the geopolitics of oil and the budgetary requirements of major oil producers, specifically Russia, and Saudi Arabia, despite the ongoing ‘war’, oil markets soon resumed their downward journey.

And while the supply side of the equation has not been impacted in any real sense by the ongoing ‘war’, clouds are beginning to dominate the demand horizon, holding the markets tight from any real upward momentum.

To a certain extent, besides Brazil, India and some other Asian economies, China has been the real growth engine of the world. That engine is stuttering.

A private survey last Friday showed that while China’s services activity expanded at a slightly faster pace in October, sales grew at the softest rate in 10 months and employment stagnated as business confidence waned.

The Chinese National Bureau of Statistics reported last week that China’s manufacturing activity contracted in October. The official purchasing managers’ index fell to 49.5 in October from 50.2, dipping back below the 50-point level, demarcating contraction from expansion.

Taking the cue of a slipping demand, American drillers are also throttling back. They seem wary about slipping prices. Drillers dropped eight rigs in the past week, reported oilfield service firm Baker Hughes, leaving 496 active rigs across the U.S. oil patch. That is starkly down from 627 at the end of November last year.

When seen from the perspective that this was despite the additional, voluntary output cut from the Organisation of Petroleum-Exporting Countries (OPEC) majors — Saudi Arabia and Russia, all these are warning signs for the global crude demand scenario. The uncertainty factor has entered the equation.

By 2030, with nearly 10 times as many electric cars on roads than today, 80pc of new power is projected to be derived from renewables and electric heating

The World Bank is of the view that if the Israel-Hamas conflict doesn’t widen, then as per its “small disruption” scenario, the effects of the ongoing ‘war’ should be limited — and oil prices are expected to decline in 2024 to an average of $81 a barrel.

Richard Bronze, co-founder and head of geopolitics at consultancy Energy Aspects, told CNN earlier last week that the biggest reason for the decline in oil prices was the concern in the “market about the health of the global economy and the implications for oil demand.” There are indications that demand for oil is softening globally, particularly in Europe, he added.

Concerns about global economic growth were also underscored last Monday when Germany — Europe’s biggest economy — reported that its gross domestic product shrank in the third quarter as consumers reined in spending.

Besides, pressure on oil consumption is also growing from the global push to switch to alternatives. The transition is imminent. By 2030 with nearly 10 times as many electric cars on roads than today, 80pc of new power is projected to be derived from renewables and electric heating, outselling gas boilers.

The International Energy Agency (IEA) stressed in its just unveiled World Energy Outlook 2023 that, ‘the energy world will look different by 2030, even under today’s policy settings’, reiterating the claim that crude oil, natural gas, and coal will peak before 2030.

“The transition to clean energy is happening worldwide and it’s unstoppable. It’s not a question of ‘if’, it’s just a matter of ‘how soon’ — and the sooner the better for all of us,” said Fatih Birol, IEA executive director, in a statement.

The OPEC is not convinced. The latest rash of high-scale oil and gas mergers and acquisitions is an indication that fossil fuels are here to stay, Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman said a couple of weeks earlier.

“Exxon, Chevron didn’t buy because they want to have stranded assets,” Prince Abdulaziz said at Riyadh’s FII annual investment conference. He was referring to Exxon’s announcement of its $60bn acquisition of Pioneer Natural Resources and Chevron’s $53bn acquisition of Hess — both announced within two weeks of each other and sending waves in the oil industry.

Prince Abdulaziz said the same of his own motivations for investing in increasing Saudi Arabia’s oil output capacity to 13 million barrels per day. “We are investing not to create a stranded asset,” he said, adding that Saudi Arabia wouldn’t be investing in increasing oil production capacity if there wasn’t demand for that increased production.

But there is another way of looking at the debate too. The very rush in Saudi Arabia, to diversify away from oil revenues and lessen reliance on petrodollars, as envisaged in its Vision 2030, raises some questions. Some feel Riyadh is not confident of the crude oil outlook in 2030 and beyond. Hence the rush to diversify.

The apparent lack of demand has played a significant role in keeping the crude oil markets tamed despite the hostilities in the oil-rich Middle East — the major oil exporting region of the world. The global energy equation has changed.

Published in Dawn, The Business and Finance Weekly, November 6th, 2023