GULF CHOKEPOINT AND SHIFTING ENERGY ORDER

Oil volatility, sanctions and the West Asia conflict are reshaping energy flows—reviving past shock cycles and heightening market uncertainty with rising stagflation risks

- RANJAN TANDON

FINANCIAL markets staged a cautious relief rally as oil prices retreated from recent highs. Perception and reality alternate to reflect the temperament amid high volatility. The shuttering at the Strait of Hormuz was always plausible as Iran’s defensive salvo and was forecast to precipitate a deeper crisis than that of the 1970s. An incessant global energy insecurity, resting on a shaky and contentious opening of the passage, could set the stage for stagflation.

A flashback to December 17, 2010 in Tunisia, a North African nation, a short distance across the Mediterranean from Europe. Police harassment and humiliation of a street vendor outside the governor’s office in the town of Sidi Bouzid led him to self-immolate. His death in January 2011 was the beginning of the Arab Spring. The initial pro-democracy protests in Tunisia reverberated through Egypt, Syria, Morocco, Algeria and other parts of North Africa. Social violence and civil wars erupted in Libya and Yemen, resulting in major production outages. The oil price flare cast a shadow of uncertainty and financial insecurity over global economies for the next three years.

At a formal meeting of the Organization of Petroleum Exporting Countries members in June 2011, Iran, under sanctions on its oil, dissented from increasing the group’s production. Saudi Arabia, at the time, unilaterally decided to increase its output by 1 million barrels per day to make up for the loss of Libyan light crude and stabilise the market, as the UAE also released more oil to ease prices.

Oil lingered above $100 for the next three years, as Brent averaged around $108 in 2013. Global supplies flowed unhindered, and by the end of 2014, prices declined almost 50 percent, touching $62, as US Shale production surged.

In sharp contrast, restraints at the strait, impeding the Gulf’s oil and gas transit, shall permanently reset global energy and politico-economic equations.