Geopolitically driven oil price shocks are often more short-lived than investors realize. Historical experience shows that unless there is a significant disruption in oil production from the Middle East, the impact of such shocks is likely to be contained within a limited scope.
When the news broke that Israel attacked Iran's nuclear facilities, oil prices surged by 12% instantly. However, Historical Data reveals an unexpected truth: geopolitical-driven oil price shocks are often more short-lived than investors imagine, and the real threat may lie elsewhere.
The European Central Bank's research in 2023 reveals an unexpected pattern: the impact of geopolitical shocks on oil prices is often fleeting: after the 9/11 attacks, Brent crude oil prices immediately rose by 5%, but plummeted by 25% within 14 days, as investors began to worry that an economic slowdown would weaken oil demand; after the outbreak of the Russo-Ukrainian conflict in 2022, Brent oil prices soared by 30% within two weeks, 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 boosts the convenience yield of holding oil contracts, thereby pushing up oil prices.
However, in the long term, the economic activity channel begins to take effect—geopolitical tensions hit global demand, uncertainty suppresses investment and consumption, ultimately lowering oil demand and prices.
Research by the Dallas Federal Reserve earlier this year is more direct: even in the event of a supply shortage on the scale of 1973 or 1979, the shock to economic output would be only 0.12%. In other words, unless risks truly materialize, geopolitical-driven increases in oil prices are unlikely to trigger a severe economic recession.
Never predict oil prices.
In the face of the current situation, leading companies in the NENGYUANHANGYE are showing a rare cautious attitude.
At the Asia Energy Conference held in Kuala Lumpur, Baker Hughes President and CEO Lorenzo Simonelli candidly told CNBC:
My experience tells me never to 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 declined to make definitive predictions, although she acknowledged that forward prices have already been affected 'very significantly.' She particularly emphasized that if supplies in the Strait of Hormuz are impacted, 'it will have a more significant effect on prices because global customers will rush 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 a backdrop of global daily oil demand reaching 0.1039 billion barrels, even if Iran's production were completely interrupted, Saudi Arabia and the UAE's rapid production increase capability of over 3.5 million barrels is theoretically sufficient to fill the gap.
However, market panic far exceeds supply-demand fundamentals—the real concern of investors is that escalating conflicts could lead to Tehran blocking the Strait of Hormuz, or even attacking neighboring oil facilities.
The Strait of Hormuz carries about 20% of the world's oil transportation volume and is the only route from the Persian Gulf to the open sea. The US Energy Information Administration calls it 'the world's most important oil transportation choke point.' As of Sunday, the Joint Maritime Information Center confirmed that the strait remains open, despite rumors of a possible Iranian blockade.
The 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 associated with only 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 deep in depression. This serves as a reminder to investors that although historical patterns show limited impacts from geopolitical shocks, true supply disruptions could still bring about lasting market trauma.
Even during the "Tanker War" in the 1980s, more than 200 tankers were bombed while passing through the Strait of Hormuz due to the Iran-Iraq conflict, yet oil prices stabilized after an initial surge. Historical experience suggests that unless there is a significant interruption in oil production from the Middle East, the impact of shocks is likely to be contained within a limited range.
How the current conflict involving Iran will evolve, how long it will last, and how it might escalate will determine the final direction of the market. But for those attempting to find investment opportunities amidst geopolitical turmoil, the lessons of history could not be more clear: panic often lasts shorter than reality.
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