Using history as a reference, how do Middle Eastern conflicts affect oil prices?

When news broke of Israel attacking Iranian nuclear facilities, oil prices surged 12% instantly. However, historical data reveals an unexpected truth: geopolitical-driven oil price shocks are often more fleeting than investors imagine, and the real threats may lurk elsewhere.

A study by the European Central Bank in 2023 uncovered a surprising pattern: the impact of geopolitical shocks on oil prices is often short-lived: **After the 9/11 terrorist attacks, Brent crude oil prices immediately rose by 5%, but plummeted 25% within 14 days as investors began to worry that an economic slowdown would weaken oil demand;Within two weeks of the outbreak of the Russia-Ukraine conflict in 2022, Brent oil prices soared by 30%, but returned to pre-war levels eight weeks later.

Two competing mechanisms underlie this phenomenon: in the short term, risk channels dominate—financial market panic over supply disruptions drives up the convenience yield of holding oil contracts, thereby pushing up oil prices.

But in the long term, economic activity channels begin to take effect—geopolitical tensions hit global demand, uncertainty suppresses investment and consumption, ultimately lowering oil demand and prices.

Research from the Dallas Federal Reserve earlier this year was even more direct: Even in the event of supply shortages on the scale of 1973 or 1979, the impact on economic output would only be 0.12%. In other words, unless risks materialize, geopolitical-driven oil price increases are unlikely to trigger a severe economic recession.

Never Predict Oil Prices

In light of the current situation, leading companies in the energy sector are exhibiting a rare cautious attitude.

At the Asian Energy Conference held in Kuala Lumpur, Baker Hughes President and CEO Lorenzo Simonelli candidly told CNBC:

My experience tells me to never try to predict oil price trends, because one thing is certain: you will definitely be wrong.

Meg O'Neill, CEO of Australian oil and gas giant Woodside Energy, also refrained from making clear predictions, although she acknowledged that long-term prices have been "significantly" affected. She particularly emphasized that if supplies through the Strait of Hormuz are impacted, "it will have a more significant effect on prices as global customers scramble to meet their energy needs."

Fundamentally, Iran produces 3.3 million barrels of crude oil per day, of which 2 million barrels are for export. Against the backdrop of a global daily oil demand of 103.9 million barrels, even if Iranian production were completely interrupted, Saudi Arabia and the UAE's rapid production increase capacity of over 3.5 million barrels theoretically would be enough to fill the gap.

However, market panic far exceeds the supply-demand fundamentals—investors are genuinely concerned that escalating conflicts could lead Tehran to block the Strait of Hormuz or even attack neighboring oil facilities.

The Strait of Hormuz carries about 20% of the world's oil transport volume and is the only route from the Persian Gulf to the open sea, which the U.S. Energy Information Administration calls "the world's most important oil transport chokepoint." As of Sunday, the Joint Maritime Information Center confirmed that the strait remains open, despite rumors of Iran potentially blocking it

Selective Forgetting of Market Memory

The latest Global Financial Stability Report from the International Monetary Fund shows that geopolitical risk events since World War II are typically only associated with short-term slight declines in stock prices, and in most cases do not have lasting effects. Global stock markets ultimately absorbed the shocks from Iraq's invasion of Kuwait in 1990 and Russia's invasion of Ukraine in 2022.

However, the oil embargo of 1973 is an exception—12 months later, global stock markets were still deeply mired in a downturn. This serves as a reminder to investors that although historical patterns indicate limited impacts from geopolitical shocks, real supply disruptions can still lead to lasting market trauma.

Even during the "Tanker War" of the 1980s, when over 200 tankers were bombed in the Iran-Iraq conflict while passing through the Strait of Hormuz, oil prices stabilized after an initial spike. Historical experience suggests that unless there is a significant disruption in Middle Eastern oil production, the impact of shocks is likely to be contained within a limited scope.

How the current conflict between Israel and Hamas evolves, how long it lasts, and how it escalates will determine the ultimate direction of the market. But for those trying to find investment opportunities amid geopolitical turmoil, the lessons of history are clear: panic is often more fleeting than reality.