An Iranian soldier participates in military exercises near the Strait of Hormuz
The impact of the Arab Spring on the rest of the world is perhaps best manifested by the spike in oil prices due to fears of supply disruptions. But early concerns were overdone—revolution did not reach the oil-rich Gulf countries. Instead, the bigger factor keeping upward pressure on oil prices is the concern that simmering tensions between Sunnis and Shiites in the region, coupled with the west’s tough stance on Iran’s nuclear programme, might soon drag the Arab world into a full-scale conflict.
The biggest disruption to oil supplies as a result of the Arab Spring came from Libya. The country produced around 1.7m barrels a day (b/d), 2 per cent of the world’s total, before social unrest broke out. The halt to Libya’s output led to Brent prices rising by over $10 per barrel. Meanwhile, western sanctions on Syria and political turmoil in Yemen affected output in both countries. But these are minor producers. Disruption was also caused by repeated attacks on Egyptian gas lines, halting exports to Jordan and Israel, but this was of minimal global consequence.
Compared with previous conflicts in the Middle East, the disruptions to oil supplies due to the Arab Spring were not especially large—nothing like the 5m b/d fall during the Iranian revolution in 1979, or similar falls during the Arab oil embargo in 1974, the Iran-Iraq War in the 1980s or the Gulf war in 1991. Crude prices soared by over 300 per cent in the aftermath of both the Arab oil embargo and the Iranian revolution (the region’s share of global oil output was much higher at the time).
But what is threatening to dwarf any previous supply disruptions is an event seemingly unrelated to the Arab Spring: a potential full-scale conflict with Iran over its nuclear programme. Israel and the US have said that they do not rule out military action and the US, the United Nations and the European Union are tightening sanctions. A fifth of global oil supply currently passes through the Strait of Hormuz and if Iran were to act on its threat by blocking the Strait, this could result in the loss of some 15m b/d from global supply. Even if this lasted only a few days, Brent crude prices could rise by $50 per barrel.
Followers of Middle Eastern affairs have become accustomed to doomsday scenarios. But while it is easy to assume that Iran could be drawn into a wider regional conflict, the Iranian regime is not suicidal. The disastrous experience of neighbouring Iraq could act as a deterrent. And the Gulf’s financial ability to withstand a period of disruption, as well as the region’s new pipelines that bypass the Strait of Hormuz, reduces the impact of a temporary closure of the Strait. Instead, Iran will probably continue to involve itself with proxy wars in other parts of the region, such as in Syria.
Regional change, such as the rise of Islamists in North Africa, has created opportunities for Iran. Tensions between Iran and the Gulf are likely to be settled away from their own home territory. Markets must get used to a long period of instability in the region—but unless this develops into a full-scale regional conflict, growing concerns over oil supplies from the Gulf are probably exaggerated. Eventually, the weak global economy and its impact on demand will outweigh supply fears, reducing oil prices. And in time, it may be the boom in energy supply elsewhere in the world—notably in US shale—that transforms energy markets for the better.
The impact of the Arab Spring on the rest of the world is perhaps best manifested by the spike in oil prices due to fears of supply disruptions. But early concerns were overdone—revolution did not reach the oil-rich Gulf countries. Instead, the bigger factor keeping upward pressure on oil prices is the concern that simmering tensions between Sunnis and Shiites in the region, coupled with the west’s tough stance on Iran’s nuclear programme, might soon drag the Arab world into a full-scale conflict.
The biggest disruption to oil supplies as a result of the Arab Spring came from Libya. The country produced around 1.7m barrels a day (b/d), 2 per cent of the world’s total, before social unrest broke out. The halt to Libya’s output led to Brent prices rising by over $10 per barrel. Meanwhile, western sanctions on Syria and political turmoil in Yemen affected output in both countries. But these are minor producers. Disruption was also caused by repeated attacks on Egyptian gas lines, halting exports to Jordan and Israel, but this was of minimal global consequence.
Compared with previous conflicts in the Middle East, the disruptions to oil supplies due to the Arab Spring were not especially large—nothing like the 5m b/d fall during the Iranian revolution in 1979, or similar falls during the Arab oil embargo in 1974, the Iran-Iraq War in the 1980s or the Gulf war in 1991. Crude prices soared by over 300 per cent in the aftermath of both the Arab oil embargo and the Iranian revolution (the region’s share of global oil output was much higher at the time).
But what is threatening to dwarf any previous supply disruptions is an event seemingly unrelated to the Arab Spring: a potential full-scale conflict with Iran over its nuclear programme. Israel and the US have said that they do not rule out military action and the US, the United Nations and the European Union are tightening sanctions. A fifth of global oil supply currently passes through the Strait of Hormuz and if Iran were to act on its threat by blocking the Strait, this could result in the loss of some 15m b/d from global supply. Even if this lasted only a few days, Brent crude prices could rise by $50 per barrel.
Followers of Middle Eastern affairs have become accustomed to doomsday scenarios. But while it is easy to assume that Iran could be drawn into a wider regional conflict, the Iranian regime is not suicidal. The disastrous experience of neighbouring Iraq could act as a deterrent. And the Gulf’s financial ability to withstand a period of disruption, as well as the region’s new pipelines that bypass the Strait of Hormuz, reduces the impact of a temporary closure of the Strait. Instead, Iran will probably continue to involve itself with proxy wars in other parts of the region, such as in Syria.
Regional change, such as the rise of Islamists in North Africa, has created opportunities for Iran. Tensions between Iran and the Gulf are likely to be settled away from their own home territory. Markets must get used to a long period of instability in the region—but unless this develops into a full-scale regional conflict, growing concerns over oil supplies from the Gulf are probably exaggerated. Eventually, the weak global economy and its impact on demand will outweigh supply fears, reducing oil prices. And in time, it may be the boom in energy supply elsewhere in the world—notably in US shale—that transforms energy markets for the better.
