Middle East Tensions Escalate, Oil Prices Jump
Centerview Partners Senior Counselor Richard Haass says that while geopolitical tensions cause fluctuations in prices, there would have to be ongoing conflict to see a sustained upward move in oil prices. (Source: Bloomberg)
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Forbes
37 minutes ago
- Forbes
Higher Oil Prices Mean Less GDP
Iran's supreme leader Ayatollah Ali Khamenei speaks after casting his ballot during the runoff ... More presidential election in Tehran on July 5, 2024. (Photo by ATTA KENARE / AFP) (Photo by ATTA KENARE/AFP via Getty Images) The shale revolution has been a huge boon for America, producing an enormous amount of income, tax revenue and employment as well as reducing CO2 emissions. At the same time, by reducing our net oil imports, they have substantially improved our energy security. But the simple metric of net imports understates the complexity of energy security. Energy vulnerability is often treated as nothing more than reliance on imports from foreign countries, and that is certainly a crucial element but hardly the only one. Conversely, the fact that the U.S. still imports as much as eight million barrels a day of oil overstates our vulnerability: lost imports would not mean a shortage for domestic consumers, as that oil is swapped out for domestic supplies for the sake of economic efficiency, and producers can simply retain crude that is currently exported. The Figure below breaks down the source of gross imports; the decline in oil from OPEC is pronounced, while the rise of Canadian oil imports, due to higher oil sands production, exaggerates the security of our supply, albeit only slightly. U.S. Oil Imports (thousand barrels per day) On the one hand, despite ongoing tension with Canada, they are unlikely to cut off sales to the U.S. for political reasons. Nevertheless, there is no guarantee that in a new disruption of global oil supply, such as from unrest in Russia or war in the Middle East, Canadian oil would continue to be delivered to American refiners. In theory, Canada could use the U.S. for the transshipment of oil to better paying overseas customers, although given the globalized nature of the oil market, prices should not be significantly different elsewhere. Of course, should American politicians (foolishly) respond to a global oil crisis by restricting exports of domestic crude, U.S. oil prices would presumably drop below global prices, encouraging Canadian companies to export their oil elsewhere. Such a populist move by the U.S. would be detrimental and the impact multiplied if politicians tried to prevent Canadian companies from selling their oil onwards, mostly through the Gulf Coast ports. Should, say, a country like China offer attractive deals to Canadian companies for additional supply (similar to what happened in 1979), the political calculus becomes more complex. But this highlights another way the globalized oil market affects energy security: even if the U.S. is well-supplied with oil, a global oil crisis will translate into higher domestic oil prices. Absent political intervention, U.S. prices would rise to match global oil prices, meaning even with our current energy independence, a new oil crisis would inflict economic damage. Certainly, now that the U.S. is a net exporter of oil, higher oil prices would improve not worsen the trade balance. Still, sending the money from East Coast consumers to Southwest producers will have a deflationary impact on the economy because higher oil prices have an effect similar to a tax hike. Consumers would spend more for gasoline and reduce other spending accordingly. It is generally thought that a tax hike lowers GDP by 2-3 times the increased taxes, so that an increase in taxes equal to 1% of GDP yields a 2-3% reduction in GDP. Tax Increases Reduce GDP | NBER An oil price increase does not have precisely the same effect, because the money goes not from the private sector to the government but from one part of the private sector (consumers) to another (oil producers). Still, a $10/barrel increase in oil prices equates to roughly $35 billion in higher household expenditures, or about 0.1% of GDP. So, back of the envelope calculation suggests that GDP would drop somewhere on the order of 0.2% for every $10/barrel increase in oil prices. This effect is clearly seen in historical GDP data, as the figure below shows, although there are obviously many confounding factors. In all likelihood, the impact now would be less than in the past because our oil trade balance is positive; net exports, at 2 million barrels per day, will translate into modest but significant economic benefits. Still, in the case of a prolonged period of $100 per barrel oil, which many think could be achieved if the Middle East situation worsens significantly, a GDP loss of 0.5% is quite likely. Change in Real GDP (percent) At present, it appears unlikely that Middle Eastern oil supply will be affected by the ongoing conflict between Iran and Israel. Attacks on shipping or the Straits of Hormuz would boost prices but are unlikely to persist beyond a few weeks. More worrisome would be an Israeli attack on Iranian oil facilities, although at present, such is not expected. So, $100 oil for several months would not automatically translate into a recession, but would have a notable impact on GDP growth, especially if the Fed raises interest rates as higher oil prices increase inflation. But an oil price spike will definitely worsen consumer and business confidence. As much as it would be nice for cash-rich Southwesterners to spend their increased income on Maine lobster and New England clam chowder, a prolonger period of higher oil prices--$100 or more—will be disruptive enough to threaten at least significant economic slowing and potentially tip us into a recession.
Washington Post
44 minutes ago
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Zelenskyy warns oil price surge could help Russia's war effort
KYIV, Ukraine — A sharp rise in global oil prices following Israeli strikes on Iran will benefit Russia and bolster its military capabilities in the war in Ukraine, Ukrainian President Volodymyr Zelenskyy said Friday in comments that were under embargo until Saturday afternoon. Speaking to journalists in Kyiv, Zelenskyy said the surge in oil prices threatens Ukraine's position on the battlefield, especially because Western allies have not enforced effective price caps on Russian oil exports.
Associated Press
an hour ago
- Associated Press
Zelenskyy warns oil price surge could help Russia's war effort
KYIV, Ukraine (AP) — A sharp rise in global oil prices following Israeli strikes on Iran will benefit Russia and bolster its military capabilities in the war in Ukraine, Ukrainian President Volodymyr Zelenskyy said Friday in comments that were under embargo until Saturday afternoon. Speaking to journalists in Kyiv, Zelenskyy said the surge in oil prices threatens Ukraine's position on the battlefield, especially because Western allies have not enforced effective price caps on Russian oil exports. 'The strikes led to a sharp increase in the price of oil, which is negative for us,' Zelenskyy said. 'The Russians are getting stronger due to greater income from oil exports.' Global oil prices rose as much as 7% after Israel and Iran exchanged attacks over the past 48 hours, raising concerns that further escalation in the region could disrupt oil exports from the Middle East. Zelenskyy to address concerns with the US Zelenskyy said he planned to raise the issue in an upcoming conversation with U.S. President Donald Trump. 'In the near future, I will be in contact with the American side, I think with the president, and we will raise this issue,' he said. Zelenskyy also expressed concern that U.S. military aid could be diverted away from Ukraine toward Israel during renewed tensions in the Middle East. 'We would like aid to Ukraine not to decrease because of this,' he said. 'Last time, this was a factor that slowed down aid to Ukraine.' Ukraine's military needs have been sidelined by the United States in favor of supporting Israel, Zelenskyy said, citing a shipment of 20,000 interceptor missiles, designed to counter Iran-made Shahed drones, that had been intended for Ukraine but were redirected to Israel. 'And for us it was a blow,' he said. 'When you face 300 to 400 drones a day, most are shot down or go off course, but some get through. We were counting on those missiles.' An air defense system, Barak-8, promised to Ukraine by Israeli President Benjamin Netanyahu was sent to the U.S. for repairs but never delivered to Ukraine, Zelenskyy said. The Ukrainian president conceded that momentum for the Coalition of the Willing, a group of 31 countries which have pledged to strengthen support for Ukraine against Russian aggression, has slowed because of U.S. ambivalence over providing a backstop. 'This situation has shown that Europe has not yet decided for itself that it will be with Ukraine completely if America is not there,' he said. Coalition of the Willing offer under consideration The offer of a foreign troop 'reassurance force' pledged by the Coalition of the Willing was still on the table 'but they need a backstop, as they say, from America,' Zelenskyy said. 'This means that suddenly, if something happens, America will be with them and with Ukraine.' The Ukrainian president also said the presence of foreign contingents in Ukraine would act as a security guarantee and allow Kyiv to make territorial compromises, which is the first time he has articulated a link between the reassurance force and concessions Kyiv is willing to make in negotiations with Russia. 'It is simply that their presence gives us the opportunity to compromise, when we can say that today our state does not have the strength to take our territories within the borders of 1991,' he said. But Europe and Ukraine are still waiting on strong signals from Trump. Without crushing U.S. sanctions against Russia, 'I will tell you frankly, it will be very difficult for us,' Zelenskyy said, adding that it would then fall on Europe to step up military aid to Ukraine. Body and prisoner returns follow Istanbul talks In other developments, Russia repatriated more bodies of fallen soldiers in line with an agreement reached during peace talks in Istanbul between Russian and Ukrainian delegations, Russian officials said Saturday, cited by Russian state media. The officials said Ukraine did not return any bodies to Russia on Saturday. Ukraine's Coordination Headquarters for the Treatment of Prisoners of War confirmed in a statement that Russia returned 1,200 bodies. The first round of the staggered exchanges took place Monday. The agreement to exchange prisoners of war and the bodies of fallen soldiers was the only tangible outcome of the talks in Istanbul on June 2. Russia says push continues Continuing a renewed battlefield push along eastern and northeastern parts of the more than 1,000-kilometer (over 600-mile) front line, the Russian Defense Ministry claimed Saturday that its troops captured another village in the Donetsk region, Zelenyi Kut. The Ukrainian military had no immediate comment on the Russian claim. Russia launched 58 drones and decoys at Ukraine overnight into Saturday, according to the Ukrainian air force, which said its air defenses destroyed 23 drones while another 20 were jammed. Russia's defense ministry said it shot down 66 Ukrainian drones overnight. Attacks have continued despite discussions of a potential ceasefire in the war. During the June 2 talks in Istanbul, Russian and Ukrainian negotiators traded memorandums containing sharply divergent conditions that both sides see as nonstarters, making a quick deal unlikely. ___ Follow the AP's coverage of the war at
