For the first time since Russia’s invasion of Ukraine in 2022, the price of oil soared beyond $100 a barrel this week, driven by ongoing energy uncertainty after the US-Israeli war against Iran began on February 28.
About 20 percent of the world’s oil comes from the Gulf region and most of it is shipped in huge tankers through the Strait of Hormuz. This narrow waterway, located between Iran and Oman, is only 21 nautical miles (39 km) wide at its narrowest point.
More than 20 million barrels transit the strait each day, accounting for a fifth of global oil consumption and accounting for a quarter of all oil traded by sea.
According to the U.S. Energy Information Administration (EIA), more than three-quarters of the world’s oil supply (79.8 million barrels per day) travels by sea, funneled through a handful of critical points with no easy transit alternatives.
Why are oil prices rising?
Since the war with Iran began, shipping traffic through the Strait of Hormuz has almost stopped. Attacks on vessels and interference with navigation equipment have forced most operators to anchor their vessels at the edge of the waterway rather than risk crossing.
Without the flow of this oil, global supply chains are severely disrupted. With limited supply and growing demand, prices are likely to rise, putting pressure on consumers and businesses.
While prices fell briefly on Monday after US President Donald Trump said: “The war is virtually complete,” analysts warned that high prices could persist if a deal is not reached between Washington, Tel Aviv and Tehran to stop the war.
“It’s all about risk,” Ismayil Jabiyev, supply chain analyst at CarbonChain, told Al Jazeera.
“Think about the Strait of Hormuz and cheap drones. It’s not a physical blockade: Iran has not built a wall across the sea. Cheap drones will always pose a risk even if all launch sites are destroyed because hidden drone launches could continue for months. As long as hostilities continue, the disruption is likely to persist. I don’t see any real progress or resolution on the horizon,” Jabiyev added.
Which countries depend most on Middle Eastern oil?
About 89 percent of the oil flowing through the Strait of Hormuz is destined for Asian markets, with China, India, Japan and South Korea being the main buyers.
If traffic remains restricted, Gulf exporters will be forced to look for alternative routes, but options are limited, with Saudi Aramco’s East-West pipeline and the United Arab Emirates’ Abu Dhabi pipeline (Habshan-Fujairah pipeline) offering capacity of around 4.7 million barrels per day (bpd).
The Saudi pipeline runs from the eastern oil fields to the Red Sea port of Yanbu, one of the few arteries that bypasses the strait entirely. However, of the 7.2 million bpd Saudi Arabia exported in February, 6.38 million bpd depended on passage through the strait, according to Kpler, a global trade data and analytics firm.
Gavekal Research, an independent macroeconomic research firm, estimated that Gulf exporters, including Iran, could divert at most an additional 3.5 million bpd to terminals outside the strait. But as long as most tanker traffic remains suspended, the world would still face a sudden supply shortfall of around 15 million bpd.
“I’m somewhat skeptical about those alternatives. Yes, the East-West pipeline and the Fujairah pipeline exist, but in terms of capacity, they are nowhere near the main route.” Jabiyev told Al Jazeera.
“There is also the Kirkuk-Ceyhan pipeline from the northern provinces of Iraq to Turkiye, but it is limited to production from the northern fields. Most Iraqi production comes from the southern fields, so again, it is a partial replacement, not a complete one.”
What is the highest oil price ever recorded?
Oil prices rose to their highest levels during the global financial crisis. On July 11, 2008, Brent crude, the European benchmark, hit $147.50 per barrel, while West Texas Intermediate crude, the U.S. benchmark, hit a high of $147.27. That rise was driven by a combination of a weakening US dollar and a massive influx of hot money rather than a physical disruption of supply.
Throughout history, there have been a handful of energy market shocks when oil supplies were truly threatened, notably the 1973 oil embargo, the Iran-Iraq War in the 1980s, the 1990-1991 Gulf War, the 2003 U.S.-led invasion of Iraq, and the 2022 Russian invasion of Ukraine.
“I think the 1990-91 Gulf War is the most instructive comparison. Iraq and Kuwait together represented two major producers, and the disruption was severe and prolonged, lasting about half a year or more, although the military phase was quite short,” Jabiyev told Al Jazeera.
“The world experienced high crude oil prices for a prolonged period and, as a result, eventually faced some economic slowdown. This makes it more analogous to our current situation: a likely long-term disruption, sustained high prices and a significant risk of economic slowdown. The key variable, as in 1990, was how quickly the affected countries could restore their production infrastructure and restore supply.”
How is crude oil converted into gasoline?
Crude oil is a yellowish-black fossil fuel that is extracted from the ground and refined into fuels such as gasoline, diesel, and jet fuel. The refining process also produces numerous household items.
The oil is classified by thickness and sulfur content. The light, sweet crude oil is low in sulfur and is easy to refine and therefore more valuable. After extraction, the crude oil is sent to refineries where heat separates it into products. Lighter fuels form at lower temperatures, while heavier products, such as asphalt, require much more heat.
One barrel contains 159 liters or 42 gallons of crude oil. Once refined, one barrel typically produces about 73 liters or 19.35 gallons of gasoline to power cars and trucks.
What products are made from oil and gas?
Oil and gas are used for much more than just fuel. They are raw material for thousands of everyday products.
Plastics, including water bottles, food packaging, phone cases and medical syringes, are all derived from crude oil.
Crude oil is also the hidden ingredient in synthetic fabrics, such as polyester, nylon and acrylic, found in everything from sportswear to carpets. It also supports the cosmetics industry in products including Vaseline, lipsticks and concealers.
Household items also rely on oil-based ingredients, such as laundry detergents, dishwashing liquids, and paints, all of which are derived from petroleum products.
The world’s food supply essentially relies on natural gas in the form of fertilizers, which are used to improve crop yields and ensure that food production can meet demand.
How high oil costs drive up food prices
Oil and food prices move at the same pace as energy prices, affecting every stage of the food supply chain, from the fertilizers used in the fields to the trucks that transport food from the fields to supermarket shelves.
Rising oil prices directly affect shipping and transportation costs.
“The lifeblood of the global economy is transportation,” economist David McWilliams told Al Jazeera. “It’s about getting things from A to B. It’s a logistics problem, a supply chain problem, and ultimately transportation is the power of the global economy.”
Fears of stagflation (rising inflation and unemployment, which have historically caused major oil shocks) are increasing. Economists pointed to the crises of 1973, 1978 and 2008 as evidence that every significant rise in oil prices has been followed, in some form, by a global recession.
In low-income countries, where populations spend a much larger proportion of their income on food and import large quantities of grains and fertilizers, rising oil prices could quickly translate into food shortages.
