The assassination of General Qassem Soleimani has created much speculation about the possible impact on oil markets and – although any impact will very much depend upon what happens next in terms of political and military responses – theoretically the potential exists for Iran to seriously destabilize oil markets, raising oil prices.

Arguably, it would be in Iran’s interest to do so. It would certainly hurt Trump’s possibility of a second term if higher prices were to last for some time as the 2020 presidential election gets underway. And it would also help shore up Iran’s failing economy. 

The assassination did initially cause oil prices to rise by a few dollars before quickly falling back, and the missile attacks by Iran produced a similar response. However, direct action by Iran to raise prices – for example by trying to close the Strait of Hormuz – is unlikely.

Around one-fifth of the world's oil supplies passes through the Strait of Hormuz, a narrow choke point between Iran and the Arabian Peninsula. Closing it would invite serious military action by the Americans and many of its allies who, so far, have been rather lukewarm over Trump’s actions. It would also possibly limit Iran’s own oil exports.

Similarly, overt attacks on American allies in the region such as Saudi Arabia and the UAE would probably invite too heavy a reaction, although this is uncertain given the lack of response after the alleged Iranian attacks on Abqaiq and Khurais in mid-September.

Indirect action by Iran to affect oil supplies is much more likely as they have many options by using their proxies to affect others’ oil production. This is especially true for Iraq, which is now an important source of global oil supply as Iraqi exports in 2019 averaged 3.53 million barrels per day (Mb/d), a significant amount.

Iraq’s future production has already been damaged as international oil companies are withdrawing staff for safety reasons, anticipating potential attacks by both Iraqi and Iranian sources. It is now very unlikely that the crucial ‘common seawater supply project’ being run by Exxon – essential for expanding production capacity – will go ahead in the near future.

However, one important consequence of the assassination that has attracted little attention is that it has almost fully restored the role of geopolitics into the determination of oil prices. Up to 2014, geopolitics played a key role in determining oil prices in the paper markets where perceptions and expectations ruled.

Prices determined in these markets – NYMEX in New York, ICE in London and other lesser futures markets throughout the world – then influence wet barrel markets where real barrels of oil are traded. 

In 2014, the world was so oversupplied with real oil barrels that the oil price collapsed – the price of Brent crude fell from $110.72 on 23 May to $46.44 eight months later. Thereafter, little if any attention was given to geopolitical events, and geopolitics became marginalized in the determination of crude oil prices.

This began to change in 2019. The market remained physically over-supplied but events in the Gulf began to attract attention. In June, there were a series of attacks on oil tankers close to the Gulf, followed by attacks on Saudi Arabia’s Abqaiq processing facility and the Khurais oil field in September.

The Americans claimed these attacks were launched by Iran, but no convincing evidence for the claim was provided. Both attacks produced an initial price response but it was surprisingly limited and short-lived. However, it did suggest that geopolitics might be creeping back into influencing oil prices.

This became ever more noticeable in the third and fourth quarters as rumours regarding the trade talks between China and US clearly began to affect price – talks going well meant higher oil demand, and prices rose; talks going badly meant lower oil demand, and prices fell.

Meanwhile, the oil market showed signs of tightening towards the end of 2019. Although there was much cheating on the OPEC+ agreement that was trying to restrain production and protect prices, the OPEC meeting last December saw both Iraq and Nigeria agreeing to restrain production. 

US stock levels also began to fall in December and the futures markets began to price in a tightening market towards the end of 2020. Significantly, the tighter the market appears, the greater attention is paid to the level of spare producing capacity.

Just before the attack on Abqaiq, the International Energy Agency (IEA) estimated there was 3.5 Mb/d spare capacity in OPEC which, historically, is quite comfortable. However, 2.5 of this was estimated to be in Saudi Arabia, so how much of this spare capacity still existed after the Abqaiq attack?

The Saudis claimed the Abqaiq capacity was quickly restored but technical experts greeted this with considerable skepticism, not least because the Abqaiq equipment was highly specialized. If spare capacity is tight, this makes the oil price vulnerable to geopolitical scares and rumours, real or imagined. 

Although the assassination of General Soleimani has exacerbated the sensitivity of oil markets to geopolitical events, this becomes irrelevant if a serious shooting war starts in the region. Saudi Arabia, the UAE and Iraq’s oil infrastructure remains highly vulnerable to attack either directly by Iran or one of its many proxies, suggesting oil prices will become increasingly volatile but, at the same time, benefit from a rising geopolitical premium.

The assassination of General Qassem Soleimani has created much speculation about the possible impact on oil markets and – although any impact will very much depend upon what happens next in terms of political and military responses – theoretically the potential exists for Iran to seriously destabilize oil markets, raising oil prices.

Arguably, it would be in Iran’s interest to do so. It would certainly hurt Trump’s possibility of a second term if higher prices were to last for some time as the 2020 presidential election gets underway. And it would also help shore up Iran’s failing economy. 

The assassination did initially cause oil prices to rise by a few dollars before quickly falling back, and the missile attacks by Iran produced a similar response. However, direct action by Iran to raise prices – for example by trying to close the Strait of Hormuz – is unlikely.

Around one-fifth of the world's oil supplies passes through the Strait of Hormuz, a narrow choke point between Iran and the Arabian Peninsula. Closing it would invite serious military action by the Americans and many of its allies who, so far, have been rather lukewarm over Trump’s actions. It would also possibly limit Iran’s own oil exports.

Similarly, overt attacks on American allies in the region such as Saudi Arabia and the UAE would probably invite too heavy a reaction, although this is uncertain given the lack of response after the alleged Iranian attacks on Abqaiq and Khurais in mid-September.

Indirect action by Iran to affect oil supplies is much more likely as they have many options by using their proxies to affect others’ oil production. This is especially true for Iraq, which is now an important source of global oil supply as Iraqi exports in 2019 averaged 3.53 million barrels per day (Mb/d), a significant amount.

Iraq’s future production has already been damaged as international oil companies are withdrawing staff for safety reasons, anticipating potential attacks by both Iraqi and Iranian sources. It is now very unlikely that the crucial ‘common seawater supply project’ being run by Exxon – essential for expanding production capacity – will go ahead in the near future.

However, one important consequence of the assassination that has attracted little attention is that it has almost fully restored the role of geopolitics into the determination of oil prices. Up to 2014, geopolitics played a key role in determining oil prices in the paper markets where perceptions and expectations ruled.

Prices determined in these markets – NYMEX in New York, ICE in London and other lesser futures markets throughout the world – then influence wet barrel markets where real barrels of oil are traded. 

In 2014, the world was so oversupplied with real oil barrels that the oil price collapsed – the price of Brent crude fell from $110.72 on 23 May to $46.44 eight months later. Thereafter, little if any attention was given to geopolitical events, and geopolitics became marginalized in the determination of crude oil prices.

This began to change in 2019. The market remained physically over-supplied but events in the Gulf began to attract attention. In June, there were a series of attacks on oil tankers close to the Gulf, followed by attacks on Saudi Arabia’s Abqaiq processing facility and the Khurais oil field in September.

The Americans claimed these attacks were launched by Iran, but no convincing evidence for the claim was provided. Both attacks produced an initial price response but it was surprisingly limited and short-lived. However, it did suggest that geopolitics might be creeping back into influencing oil prices.

This became ever more noticeable in the third and fourth quarters as rumours regarding the trade talks between China and US clearly began to affect price – talks going well meant higher oil demand, and prices rose; talks going badly meant lower oil demand, and prices fell.

Meanwhile, the oil market showed signs of tightening towards the end of 2019. Although there was much cheating on the OPEC+ agreement that was trying to restrain production and protect prices, the OPEC meeting last December saw both Iraq and Nigeria agreeing to restrain production. 

US stock levels also began to fall in December and the futures markets began to price in a tightening market towards the end of 2020. Significantly, the tighter the market appears, the greater attention is paid to the level of spare producing capacity.

Just before the attack on Abqaiq, the International Energy Agency (IEA) estimated there was 3.5 Mb/d spare capacity in OPEC which, historically, is quite comfortable. However, 2.5 of this was estimated to be in Saudi Arabia, so how much of this spare capacity still existed after the Abqaiq attack?

The Saudis claimed the Abqaiq capacity was quickly restored but technical experts greeted this with considerable skepticism, not least because the Abqaiq equipment was highly specialized. If spare capacity is tight, this makes the oil price vulnerable to geopolitical scares and rumours, real or imagined. 

Although the assassination of General Soleimani has exacerbated the sensitivity of oil markets to geopolitical events, this becomes irrelevant if a serious shooting war starts in the region. Saudi Arabia, the UAE and Iraq’s oil infrastructure remains highly vulnerable to attack either directly by Iran or one of its many proxies, suggesting oil prices will become increasingly volatile but, at the same time, benefit from a rising geopolitical premium.

The 2007-08 financial crisis wreaked havoc on the lives of millions of people across the globe, and upended the faith of many in the prevailing economic system, with many countries still recovering a decade on.

Drawing on extensive research in his new book, Narrative Economics: How Stories Go Viral and Drive Major Economic Events, Professor Shiller will draw on a rich array of historical examples and data and outline a new way to think about economic change, and the narratives that shape it, to provide answers to questions such as whether lessons have been learned since the last financial crisis, are the same dislocations likely to occur again and what toolkits, if any, are there for anticipating the next financial crisis or recession?

Attendance at this event is by invitation only.

Recommendations

Enhanced dialogue and intensified international cooperation in four areas could significantly improve the functioning of global mineral markets:

1. Deal with the last remnants of producer-country cartels 
   Consumer countries should make a publicly visible case that in an age of interdependence and global supply chains, any remaining forms of producer-country cartels are an anachronism. Given limited means to coerce governments to stop supporting the last remaining mineral cartels in potash, a ‘naming and shaming’ approach in key forums such as the Group of Twenty (G20) and the Organization for Economic Cooperation and Development (OECD) is likely to be most effective. Such action could be initiated by the three largest potash importers China, India and Brazil, and should seek support from others such as the EU and Japan.
    
2. Prevent damaging export restrictions through win-win arrangements
   WTO litigation against export restrictions is unlikely to be a silver bullet and in the short term cooperative policy dialogues, such as those pursued by the OECD, offer the best prospects for concrete results. Such dialogues should also be initiated by major emerging economies and could focus on providing incentives such as investment packages or technology-sharing to entice producer countries to abstain from imposing restrictions. Consumers should continue to push for more specific and stricter WTO rules on export restrictions. Japan, the EU and the US should seek to include similar measures in regional trade negotiations.
    
3. Strengthen cooperation among regulators on clandestine private cartels and other anti-competitive practices 
   Concerted action will be required by governments to tackle anti-competitive practices such as clandestine cartels, price-fixing and territorial agreements. Key regulators, such as those in the EU and China, should expand collection and sharing of data and best practice on anti-trust enforcement in minerals markets. In key cases they could also coordinate prosecution. Sustained investment in institutional capacity is required in many emerging economies; this should be supported through bilateral cooperation and via regional forums. Governments should also resuscitate the stalled negotiations on the WTO’s role in competition policy.
    
4. Enhance governance for transnational market platforms and pricing mechanisms
   The responsibility to regulate key nodes in global minerals markets will remain in the hands of national bodies, but coordination is vital given interconnected global markets. International organizations and regulators should strengthen structural cooperation and exchange in the area of physical markets and with greater involvement of emerging economies. An informal high-level forum on regulating physical markets could reinvigorate debate, foster new perspectives and stimulate new partnerships. Governments in key consumer countries should also give their national regulators a clear mandate in minerals markets.

The assassination of General Qassem Soleimani has created much speculation about the possible impact on oil markets and – although any impact will very much depend upon what happens next in terms of political and military responses – theoretically the potential exists for Iran to seriously destabilize oil markets, raising oil prices.

Arguably, it would be in Iran’s interest to do so. It would certainly hurt Trump’s possibility of a second term if higher prices were to last for some time as the 2020 presidential election gets underway. And it would also help shore up Iran’s failing economy. 

The assassination did initially cause oil prices to rise by a few dollars before quickly falling back, and the missile attacks by Iran produced a similar response. However, direct action by Iran to raise prices – for example by trying to close the Strait of Hormuz – is unlikely.

Around one-fifth of the world's oil supplies passes through the Strait of Hormuz, a narrow choke point between Iran and the Arabian Peninsula. Closing it would invite serious military action by the Americans and many of its allies who, so far, have been rather lukewarm over Trump’s actions. It would also possibly limit Iran’s own oil exports.

Similarly, overt attacks on American allies in the region such as Saudi Arabia and the UAE would probably invite too heavy a reaction, although this is uncertain given the lack of response after the alleged Iranian attacks on Abqaiq and Khurais in mid-September.

Indirect action by Iran to affect oil supplies is much more likely as they have many options by using their proxies to affect others’ oil production. This is especially true for Iraq, which is now an important source of global oil supply as Iraqi exports in 2019 averaged 3.53 million barrels per day (Mb/d), a significant amount.

Iraq’s future production has already been damaged as international oil companies are withdrawing staff for safety reasons, anticipating potential attacks by both Iraqi and Iranian sources. It is now very unlikely that the crucial ‘common seawater supply project’ being run by Exxon – essential for expanding production capacity – will go ahead in the near future.

However, one important consequence of the assassination that has attracted little attention is that it has almost fully restored the role of geopolitics into the determination of oil prices. Up to 2014, geopolitics played a key role in determining oil prices in the paper markets where perceptions and expectations ruled.

Prices determined in these markets – NYMEX in New York, ICE in London and other lesser futures markets throughout the world – then influence wet barrel markets where real barrels of oil are traded. 

In 2014, the world was so oversupplied with real oil barrels that the oil price collapsed – the price of Brent crude fell from $110.72 on 23 May to $46.44 eight months later. Thereafter, little if any attention was given to geopolitical events, and geopolitics became marginalized in the determination of crude oil prices.

This began to change in 2019. The market remained physically over-supplied but events in the Gulf began to attract attention. In June, there were a series of attacks on oil tankers close to the Gulf, followed by attacks on Saudi Arabia’s Abqaiq processing facility and the Khurais oil field in September.

The Americans claimed these attacks were launched by Iran, but no convincing evidence for the claim was provided. Both attacks produced an initial price response but it was surprisingly limited and short-lived. However, it did suggest that geopolitics might be creeping back into influencing oil prices.

This became ever more noticeable in the third and fourth quarters as rumours regarding the trade talks between China and US clearly began to affect price – talks going well meant higher oil demand, and prices rose; talks going badly meant lower oil demand, and prices fell.

Meanwhile, the oil market showed signs of tightening towards the end of 2019. Although there was much cheating on the OPEC+ agreement that was trying to restrain production and protect prices, the OPEC meeting last December saw both Iraq and Nigeria agreeing to restrain production. 

US stock levels also began to fall in December and the futures markets began to price in a tightening market towards the end of 2020. Significantly, the tighter the market appears, the greater attention is paid to the level of spare producing capacity.

Just before the attack on Abqaiq, the International Energy Agency (IEA) estimated there was 3.5 Mb/d spare capacity in OPEC which, historically, is quite comfortable. However, 2.5 of this was estimated to be in Saudi Arabia, so how much of this spare capacity still existed after the Abqaiq attack?

The Saudis claimed the Abqaiq capacity was quickly restored but technical experts greeted this with considerable skepticism, not least because the Abqaiq equipment was highly specialized. If spare capacity is tight, this makes the oil price vulnerable to geopolitical scares and rumours, real or imagined. 

Although the assassination of General Soleimani has exacerbated the sensitivity of oil markets to geopolitical events, this becomes irrelevant if a serious shooting war starts in the region. Saudi Arabia, the UAE and Iraq’s oil infrastructure remains highly vulnerable to attack either directly by Iran or one of its many proxies, suggesting oil prices will become increasingly volatile but, at the same time, benefit from a rising geopolitical premium.