Oil Prices Hold Firm Amid War: A New Equilibrium in the Global Energy Market

(Source: Wall Street Journal)

This blog analyzes the reason why crude oil prices are remaining unexpectedly stable despite the escalating Israel-Iran conflict and the underlying structural changes.

A Surprising Oil Market Reaction

When Israel launched an attack on Iran’s nuclear facilities and Iran retaliated by striking Israel’s largest oil refinery last week, most energy market analysts braced for a sharp spike in oil prices. Initially, Brent crude did jump to $78 per barrel, but it quickly pulled back to around $74, nearly returning to pre-conflict levels.

This reaction runs counter to the traditional logic of geopolitical risk premiums. Even though the conflict involves two nations adjacent to the Strait of Hormuz — a chokepoint for one-third of global seaborne oil transport — prices stabilized swiftly. That reflects deeper changes in how today’s energy markets operate.

The Strait of Hormuz: Still a Strategic Stronghold, Changed Responses

The Strait of Hormuz remains one of the world’s most strategic energy arteries. Some 21 million barrels of oil per day — from Iran, Iraq, Kuwait, Saudi Arabia, Qatar, and the UAE — pass through the strait. According to energy analytics firm Kpler, there has been no decline in the number of tankers using this route. Ship-tracking data from the Financial Times supports that finding.

One critical point is the nature of the attacks. Israel avoided targeting Iran’s key export terminal on Kharg Island, and Iran did not attempt a blockade of the Strait — a threat it has often used in the past. Instead, both sides restricted their attacks to domestic energy infrastructure, showing strategic restraint.

A New Foundation for Supply Stability

One major reason for oil price stability lies in the shifting global supply landscape. As of March, U.S. oil production hit a record high of 13.5 million barrels per day. Other producers, including Saudi Arabia, Brazil, Guyana, and Canada, are also ramping up output.

In particular, U.S. shale oil producers welcome prices above $70 per barrel. Prices falling closer to $60 previously led to shutdowns of some drilling operations — but current levels may reignite output. Experts suggest that no country involved in the conflict benefits from targeting core energy infrastructure.

Changing Geopolitical Calculus

The regional power balance has also evolved. Iran and Saudi Arabia restored diplomatic ties in 2023, which significantly lowers the odds of Iran attempting a Strait of Hormuz closure. Though Iran has historically threatened or attempted disruption — including during the 1980s Iran-Iraq War and tanker attacks in 2019 — a full blockade has never occurred.

JPMorgan’s commodities team notes that while the strategic importance of Hormuz is real, “it has never been closed in history, so the risk remains very low.”

Limits of Energy Weaponization

The episode underscores the diminishing power of using energy as a geopolitical weapon. Iran currently produces around 3.2 million barrels per day and exports over half of it — primarily to China. Blocking the Strait would hurt Iran’s own economy, creating a self-defeating dilemma.

Some speculate Iran could instead target oil facilities within drone range, such as in Saudi Arabia or Iraq. In 2019, a drone strike on Saudi Arabia’s largest processing facility cut its output in half and sent global oil prices surging 20%. However, experts believe such action would be a last resort.

Lessons from Russia’s Sanctions

The current situation also reflects the limits of sanctions. Despite a G7-imposed price cap of $60 per barrel, Russia has largely bypassed restrictions with the help of China and India. In 2023, it exported 7.5 million barrels per day — only 400,000 less than in 2021 — and still earned over $450 million per day from oil exports.

New proposed U.S. legislation, led by Senator Lindsey Graham, would impose 500% tariffs on countries purchasing Russian energy. Yet the Trump administration is reportedly hesitant to support the bill, fearing a rise in oil prices.

Implications for South Korea

For energy import-dependent countries like South Korea, this situation offers both reassurance and warning. In the short term, stable oil prices are a positive sign for the economy. But in the long run, it highlights the urgent need to diversify energy sources. Given Korea’s continued reliance on the Middle East, securing alternative suppliers — such as the U.S., Norway, and Canada — is essential. Accelerating the shift to renewable energy is also crucial to reduce structural risk.

A Market Searching for a New Balance

The relative stability of oil prices amid the Israel-Iran conflict reflects a market gradually discovering a new equilibrium. Instead of sharp price shocks, diversification and supply flexibility are defining features of today’s oil landscape. However, this doesn’t mean geopolitical risk has vanished. A direct attack on Saudi oil fields or a true Strait of Hormuz blockade would quickly change the outlook. And if the conflict spreads or persists, further volatility remains possible.

Strategic Takeaway

Ultimately, this conflict shows that today’s energy markets are far more resilient than in the past. Diverse supply sources, greater production agility, and economic pragmatism among major producers have all weakened the impact of traditional energy weaponization strategies.

Yet this stability should not breed complacency. Energy security remains a pillar of national security, and long-term stability will require ongoing diversification and structural transition toward renewables. The lesson isn’t just that oil prices stayed flat — it’s that the global energy order is evolving, and strategies must evolve with it.