Six Months In: Iran War Widens as Energy Markets Feel the Shock

Jason Bordoff (0:04)

Oil markets are kind of entering a new phase of this crisis, or you could say maybe we're now getting into the phase that we all expected we would see when the crisis began. It just has taken six months to really start to see oil markets tightening up.

Karen Young (0:21)

I think there's an obvious missing party, right? When we talk about Iran and the US and potential return to an MOU or new negotiations. I mean, the Gulf States are sitting right smack in the middle of that and have not really had a say rather than just being attacked.

Richard Nephew (0:36)

It ends really, I think, in one of two ways. We're either able to get to a new accommodation, which is likely to involve concessions to the Iranian position on this, or it's going to require an escalation that is going to require a lot larger commitment and a higher risk being faced by the United States.

Jason Bordoff (0:50)

More than six months into the war with Iran, the Strait of Hormuz crisis continues to cause turmoil in the Gulf region and in global energy markets with no apparent end in sight. Tanker traffic through the Strait has collapsed to a fraction of its pre-war baseline and the fallout is spreading. Brent crude broke $100 a barrel for the first time since July, and US diesel prices have climbed above $6 a gallon for the first time in history.

US Navy blockade has all but shut down Iranian oil exports, but the conflict is no longer confined to Iran and the Strait. Last week, Saudi Arabia's East-West pipeline was struck. It could stay offline for weeks. Iran-aligned Houthi forces seized Yemen's Red Sea coastline, and a Panama flag tanker carrying Iraqi fuel oil caught fire in the crossfire, a sign that oil flows well beyond Iran's borders, are now at risk. Meanwhile, President Trump continues to predict the war will end shortly after the US midterms, even as his own administration reportedly warns privately that Iran can hold out a lot longer than that. So with the conflict spreading, has this become a multi-front regional war? How much further could oil and diesel prices climb? And how does this conflict unwind? And how does it actually end?

This is Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I'm Jason Bordoff.

Today on the show, Richard Nephew, Daniel Sternoff and Karen Young. Richard, Daniel and Karen are all scholars here at the Center on Global Energy Policy. They are familiar voices on this podcast with deep expertise in energy markets and Middle East geopolitics. They joined me to discuss the ongoing impacts of the war in Iran. We talked about the latest escalation on the ground and what's driving it. The state of play in the Strait of Hormuz and why oil and refined product prices keep climbing, including why the crack spread, the gap between crude and refined products, keeps widening and what all of that means for prices at the pump. I hope you enjoy our conversation.

Karen Young, Richard Nephew, Daniel Sternoff. Welcome back to Columbia Energy Exchange. We have been talking a lot to all of you guys over the course of this year.

Thanks for coming back on and explaining to everyone where things stand. Daniel, let me start with you. I think the last time we talked, there was a sense among many that this was the energy crisis that wasn't the largest oil supply disruption in history. But oil prices didn't go up that much, and then they seem to be falling.

Six weeks ago, we were in the mid-70s. Something has changed. Talk to me about where we are right now in oil markets, and then let's come to Richard and Karen to understand what's happening in the Gulf, what's happening in Iran, and where this may go from here. Yeah, absolutely. So oil markets are entering a new phase of this crisis, or you could say maybe we're now getting into the phase that we all expected. We would see when the crisis began, it just has taken six months to really start to see oil markets tightening up. So we're up about $30 over the last year. Since the Memorandum of Understanding collapsed in July, we've rallied about $30. Brent is currently trading around $107. That's still below the peaks above $120 that we saw in April, May. But there's no doubt that we're starting to tighten and it's manifesting not just their crude oil prices, but through refined products, through cracks, through inventories, through spreads. Kind of every metric you can look across the oil market, there is a supply deficit. It's probably around 5 million barrels per day on a global basis divided between crude oil and oil products. And there's really nowhere to hide. And so to your question about why we didn't trade this previously, it's because we entered this crisis with a lot of buffers and a lot of cushion. That was the surplus in the market because OPEC was unwinding last year.