By Brian Swint

The escalating conflict between Israel and Iran has sent oil prices higher over the past few days. If history is anything to go by, the pressure it's putting on global energy costs will fade before too long.

That's because the fears of a sudden shortage of oil supply in the global market are usually exaggerated--the risk that geopolitical events create a shortage of crude almost never materialize, even though that's always the first thing on traders' minds.

West Texas Intermediate gained 1.9% to $76.58 a barrel on Thursday. U.K. shares of BP and Shell were both up about 1%. Exxon and Chevron didn't trade because markets were closed for the Juneteenth holiday.

While history may show initial market concerns are often overblown, there's still a risk of prolonged higher prices in the current climate.

Iran accounts for some 3% of global oil supply. That may not sound like a lot, but but prices can jump significantly if even only a little bit of what's expected to get to market doesn't make it.

A cutoff of the Strait of Hormuz would be an even bigger problem. Shell CEO Wael Sawan, speaking in Tokyo Thursday said that the biggest impact from the conflict on global trade would be if this artery, is blocked, Bloomberg reported. About a quarter of the world's oil passes through it.

But at the same time, shipping would surely adjust as a result, much as it did when Houthi rebels in Yemen stepped up attacks on ships in the Red Sea a year ago.

What's more, despite a week of heightened hostilities, there's no evidence yet that any of Iran's oil industry has been seriously damaged.

"Thus far, zero barrels have been disrupted," and "if anything, Iranian oil exports are in overdrive," said TD Securities analyst Daniel Ghali.

"Our analysis of three quarter-centuries of geopolitical risks suggests that Brent crude at $75/bbl is already consistent with the risk premium historically required for the typical conflict in the Middle East, but tail risks remain elevated nonetheless."

Even longer potential delays in oil deliveries have historically blown over. Look at what happened when Russia invaded Ukraine in 2022, when Western nations quickly imposed sanctions on Russian sales.

Oil prices were already rising before the surprise attack, and jumped even higher on worries that output from Russia--the third biggest producer after the U.S. and Saudi Arabia--would be stranded, either disrupted from the war, or shunned by the wider world. That never actually happened, and global crude prices returned to their pre-invasion levels less than six months later, according to Dow Jones Market Data.

Of course, there was a time when oil supply was seriously constrained--namely, the Arab oil embargo of the 1970s that kept energy prices high for almost a decade and caused several recessions.

Yet a lot has changed since then. For one, the Organization of the Petroleum Exporting Countries controls less of the total supply. To be sure, it still has power over enough of it to make a difference in prices, but it would take a lot of discipline on the part of its members to keep output restrained, especially if oil prices are high.

Additionally, the world economy relies less on oil for growth than it used to. The World Bank estimates that, in the 1970s, it took 0.12 tons of oil equivalent to create one unit of economic output. By 2022, that had fallen to 0.05. The drop in oil intensity is a result of more efficient use of fuel as well as the greater prevalence of alternatives such as hydroelectric or wind power.

For the past 40 years, the biggest increases in oil prices have all been driven by demand. The biggest long-term increases came in the 2000s before the 2008-09 financial crisis, when the global economy was booming and prices approached $150 a barrel. The run-up in 2021 and 2022 before Russia's war in Ukraine was led by the recovery from the Covid-19 pandemic. And the recent languishing of prices--they dipped below $60 a barrel in May--was a result of a darkening economic outlook and the risk of slowdowns in global trade.

The bottom line is, there's usually plenty of oil in the world to go around. The bigger driver of oil prices in the longer term tends to be demand, and that's still weak.

Write to Brian Swint at brian.swint@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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June 19, 2025 10:50 ET (14:50 GMT)

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