• Speculation of oil supply cuts rise ahead of the OPEC+ meeting scheduled for the 30th of November
• The White House’s energy security advisor states that he is confident that Arab states won’t weaponise oil like they have done in the past
Firstly, OPEC (Organization of the Petroleum Exporting Countries) is essentially an oil cartel and its main function is controlling oil supply. 7 of the 13 members can be described as Muslim majority countries these include: Algeria, Iran, Iraq, Kuwait, Libya, Saudi Arabia and the United Arab Emirates. A wider group called OPEC+ was formed in 2016 for further control over the world’s oil supply this group includes: Russia, Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, South Sudan and Sudan.
The current geopolitical climate with Israel’s bombardment of Gaza leaves the rest of the Islamic world with important decisions to make as a response to Israel and its backers. One of these decisions (specifically for oil-exporting Muslim countries) are whether to weponise oil or not.
This situation closely resembles the oil crisis of 1973, where the Arab members of OPEC (led by King Faisal of Saudi Arabia) decided to place an embargo on countries who supported Israel in the Yom Kippur war. These countries included: The USA, UK, Canada, Japan and more.
This oil embargo caused a worldwide recession and caused the price of oil to increase by 400% within a couple of days. This embargo had significant geopolitical and global economic effects for decades to come. The effects on the USA were substantial too as it led to high inflation, stagnation of the economy and a stock market crash from 1973-1974. The impact was so much that large lines of cars queued up in gas stations as a result of gas shortages in the USA. The embargo was then lifted in 1974. This essentially shifted the balance of power especially between countries that consumed oil and countries that produced oil.
While the embargo did have a negative impact on the western world, it also deeply affected the OPEC countries themselves and subsequently led to a decline of dependency on OPEC member countries for oil. This came as a result of the development of non-OPEC oilfields, namely in Siberia, Alaska and the North Sea. Furthermore, during the 1980s, the Soviet Union became the biggest oil producer and other non-OPEC countries like Brazil, Egypt, India and more countries doubled their oil production. Despite oil prices reaching highs of around $150 a barrel (in 2023 dollars and adjusted for inflation) in 1980, all of the previously mentioned reasons and more led to a sharp decline in oil prices in 1986 to around $30 a barrel (in 2023 dollars and adjusted for inflation).
Therefore, the embargo was initially effective as a means of retaliation on countries who supported Israel but not so effective in the long run for OPEC countries. Also, given the USA’s commitments to Israel, policy towards Israel didn’t change. This is all reflective of Joe Bidens’ statements that Israel “protects the interests” of the USA in the middle east and “had there not been an Israel”, the USA “would have to create one”. But what did change was the policy towards the whole middle east, as the USA made it an objective to never be held hostage to middle eastern oil producers again.
Now looking back at this context, it becomes clearer why the supreme leader of Iran (Ali Khamenei) urged the Islamic members of OPEC to place an embargo on Israel and its supporters recently at the Arab-Islamic summit. OPEC holds 80% of the world’s oil reserves and represents 30% – 40% of the world’s oil production, meaning an embargo would have a significant effect.
The current price of oil may cause OPEC to cut oil production to increase oil prices rather than the embargo. Production cuts have already happened this year by Russia and Saudi Arabia around September time leading to increases in oil prices. If another production cut takes place, it may come only from economic reasons and nothing to do with the situation in Gaza. This is because oil prices have been steadily decreasing since it last reached highs of $120 a barrel following the Russia-Ukraine war. Despite the Middle East supplying a lot of the world’s oil and being home to the oil choke point of the world (the Strait of Hormuz), the recent instability hasn’t led to major increases in oil prices with only a slight jump in prices in October. With the recent hostage releases, and the “pause” of fighting oil prices have continued to decrease in November to around $75 a barrel.
Graph showing WTI Crude oil prices from January 2022 – November 2023
Having gone through the current oil market, analysis from the World Bank states that a loss in global crude oil supply of 6-8 million bpd (barrels per day) would cause a 56-75 percent increase in prices to between $140 and $157 a barrel. However, an embargo by the Islamic members of OPEC, as called for by Iran, would likely lead to a much bigger loss of global oil supplies than the World Bank has calculated. The Islamic members of OPEC produce just over 24 million bpd or about 30 percent of the current average total global production of about 80 million bpd.
If this analysis is accurate, then an embargo would be very effective. However, looking at the other side of this, the majority (close to 70%) of OPEC’s oil is exported to Asia with OPECs demand largely being driven by China and India. The USA gets the majority of its oil from Canada and Mexico as it has intentionally or otherwise reduced its dependance on OPEC. And being previously “dependent” on Russia for oil, the EU and the UK imports the majority of its oil from the USA, Norway and Kazakhstan.
With vast uncertainty of how the war will end up on both sides, it is difficult to predict whether oil prices will increase or decrease, therefore it is equally as difficult to predict different countries’ policies regarding oil supply. However, one thing remains true. Israel is still bombing Gaza and Palestinians are still being persecuted, meaning that any sort of action must be taken whether it is diplomatic or economic in order to stop the increasingly inevitable genocide of the Palestinian people.
