Why geopolitical shocks no longer drive oil prices
Whenever a crisis erupts in the Middle East, global attention immediately turns to oil markets, as though higher oil prices are an inevitable consequence of regional instability. Yet the recent conflict presented a striking economic paradox. Despite the disruption of nearly 20 million barrels per day of crude oil and petroleum products passing through the Strait of Hormuz, equivalent to approximately 20 per cent of global oil consumption and the interruption of more than 1.1 billion barrels of supplies during the crisis, oil prices failed to reach the extraordinary levels witnessed in previous geopolitical shocks. The real question, therefore, is not why oil prices increased, but why they did not rise even further.
The answer lies in the fact that the oil market no longer operates according to the same rules that governed it for decades. In the past, supply disruptions were the dominant driver of oil prices, and any threat to production or transportation was sufficient to trigger sharp price increases. Today, however, global demandhas become the more influential variable in the pricing equation. This explains why J.P. Morgan revised its Brent crude forecasts downward to an average of $86 per barrel in the third quarter of 2026, $80 in the fourth quarter, and around $78 by the end of the year. These projections do not necessarily reflect an abundance of oil supply; rather, they signal expectations of slower global economic growth and weaker demand for energy.
A major part of this transformation can be traced to China. For decades, China was the principal engine of growth in global oil demand, and any acceleration in its industrial activity translated directly into higher oil prices. Today, however, slower economic growth, the rapid expansion of electric vehicles, and significant improvements in energy efficiency have reduced the pace of Chinese oil demand growth. As a result, the market has lost one of its strongest historical sources of upward price pressure.
At the same time, the supply side has also changed. OPEC is no longer the only producer capable of balancing global markets. The United States, Brazil, Guyana, and Canada have emerged as major contributors to global oil production, providing the market with greater flexibility to offset temporary supply disruptions. This additional flexibility has reduced market anxiety and weakened what is commonly referred to as the geopolitical risk premium, the additional price investors were once willing to pay in anticipation of supply interruptions. Geopolitical conflicts remain important, but they are no longer the sole, or even the dominant, force shaping oil prices.
Nevertheless, this apparent calm should not be interpreted as lasting stability. The International Monetary Fund has emphasized that markets absorbed the recent shock by relying on exceptional measures, including drawing down commercial and strategic oil inventories, increasing production outside the Gulf region, and benefiting from subdued global demand. In other words, the market weathered the crisis by consuming a significant portion of its protective buffers, leaving it more vulnerable to future disruptions should similar conditions not prevail.
What has fundamentally changed is not the scale of geopolitical risks, but rather the way markets respond to them. Oil prices today are influenced as much by expectations of global economic growth, demand conditions, and improvements in energy efficiency as they are by military or political developments. Consequently, lower oil prices should not necessarily be interpreted as a sign of reduced geopolitical risk; they may instead reflect a global economy that is slowing more rapidly than it is expanding.
The central question, therefore, is no longer whether geopolitical conflicts will push oil prices higher. Rather, it is whether the global economy possesses sufficiently strong demand to transform supply disruptions into a sustained increase in prices. The answer today appears fundamentally different from what it was two decades ago, and this represents the new reality governing global oil markets.
Whenever a crisis erupts in the Middle East, global attention immediately turns to oil markets, as though higher oil prices are an inevitable consequence of regional instability. Yet the recent conflict presented a striking economic paradox. Despite the disruption of nearly 20 million barrels per day of crude oil and petroleum products passing through the Strait of Hormuz, equivalent to approximately 20 per cent of global oil consumption and the interruption of more than 1.1 billion barrels of supplies during the crisis, oil prices failed to reach the extraordinary levels witnessed in previous geopolitical shocks. The real question, therefore, is not why oil prices increased, but why they did not rise even further.
The answer lies in the fact that the oil market no longer operates according to the same rules that governed it for decades. In the past, supply disruptions were the dominant driver of oil prices, and any threat to production or transportation was sufficient to trigger sharp price increases. Today, however, global demandhas become the more influential variable in the pricing equation. This explains why J.P. Morgan revised its Brent crude forecasts downward to an average of $86 per barrel in the third quarter of 2026, $80 in the fourth quarter, and around $78 by the end of the year. These projections do not necessarily reflect an abundance of oil supply; rather, they signal expectations of slower global economic growth and weaker demand for energy.
A major part of this transformation can be traced to China. For decades, China was the principal engine of growth in global oil demand, and any acceleration in its industrial activity translated directly into higher oil prices. Today, however, slower economic growth, the rapid expansion of electric vehicles, and significant improvements in energy efficiency have reduced the pace of Chinese oil demand growth. As a result, the market has lost one of its strongest historical sources of upward price pressure.
At the same time, the supply side has also changed. OPEC is no longer the only producer capable of balancing global markets. The United States, Brazil, Guyana, and Canada have emerged as major contributors to global oil production, providing the market with greater flexibility to offset temporary supply disruptions. This additional flexibility has reduced market anxiety and weakened what is commonly referred to as the geopolitical risk premium, the additional price investors were once willing to pay in anticipation of supply interruptions. Geopolitical conflicts remain important, but they are no longer the sole, or even the dominant, force shaping oil prices.
Nevertheless, this apparent calm should not be interpreted as lasting stability. The International Monetary Fund has emphasized that markets absorbed the recent shock by relying on exceptional measures, including drawing down commercial and strategic oil inventories, increasing production outside the Gulf region, and benefiting from subdued global demand. In other words, the market weathered the crisis by consuming a significant portion of its protective buffers, leaving it more vulnerable to future disruptions should similar conditions not prevail.
What has fundamentally changed is not the scale of geopolitical risks, but rather the way markets respond to them. Oil prices today are influenced as much by expectations of global economic growth, demand conditions, and improvements in energy efficiency as they are by military or political developments. Consequently, lower oil prices should not necessarily be interpreted as a sign of reduced geopolitical risk; they may instead reflect a global economy that is slowing more rapidly than it is expanding.
The central question, therefore, is no longer whether geopolitical conflicts will push oil prices higher. Rather, it is whether the global economy possesses sufficiently strong demand to transform supply disruptions into a sustained increase in prices. The answer today appears fundamentally different from what it was two decades ago, and this represents the new reality governing global oil markets.
Whenever a crisis erupts in the Middle East, global attention immediately turns to oil markets, as though higher oil prices are an inevitable consequence of regional instability. Yet the recent conflict presented a striking economic paradox. Despite the disruption of nearly 20 million barrels per day of crude oil and petroleum products passing through the Strait of Hormuz, equivalent to approximately 20 per cent of global oil consumption and the interruption of more than 1.1 billion barrels of supplies during the crisis, oil prices failed to reach the extraordinary levels witnessed in previous geopolitical shocks. The real question, therefore, is not why oil prices increased, but why they did not rise even further.
The answer lies in the fact that the oil market no longer operates according to the same rules that governed it for decades. In the past, supply disruptions were the dominant driver of oil prices, and any threat to production or transportation was sufficient to trigger sharp price increases. Today, however, global demandhas become the more influential variable in the pricing equation. This explains why J.P. Morgan revised its Brent crude forecasts downward to an average of $86 per barrel in the third quarter of 2026, $80 in the fourth quarter, and around $78 by the end of the year. These projections do not necessarily reflect an abundance of oil supply; rather, they signal expectations of slower global economic growth and weaker demand for energy.
A major part of this transformation can be traced to China. For decades, China was the principal engine of growth in global oil demand, and any acceleration in its industrial activity translated directly into higher oil prices. Today, however, slower economic growth, the rapid expansion of electric vehicles, and significant improvements in energy efficiency have reduced the pace of Chinese oil demand growth. As a result, the market has lost one of its strongest historical sources of upward price pressure.
At the same time, the supply side has also changed. OPEC is no longer the only producer capable of balancing global markets. The United States, Brazil, Guyana, and Canada have emerged as major contributors to global oil production, providing the market with greater flexibility to offset temporary supply disruptions. This additional flexibility has reduced market anxiety and weakened what is commonly referred to as the geopolitical risk premium, the additional price investors were once willing to pay in anticipation of supply interruptions. Geopolitical conflicts remain important, but they are no longer the sole, or even the dominant, force shaping oil prices.
Nevertheless, this apparent calm should not be interpreted as lasting stability. The International Monetary Fund has emphasized that markets absorbed the recent shock by relying on exceptional measures, including drawing down commercial and strategic oil inventories, increasing production outside the Gulf region, and benefiting from subdued global demand. In other words, the market weathered the crisis by consuming a significant portion of its protective buffers, leaving it more vulnerable to future disruptions should similar conditions not prevail.
What has fundamentally changed is not the scale of geopolitical risks, but rather the way markets respond to them. Oil prices today are influenced as much by expectations of global economic growth, demand conditions, and improvements in energy efficiency as they are by military or political developments. Consequently, lower oil prices should not necessarily be interpreted as a sign of reduced geopolitical risk; they may instead reflect a global economy that is slowing more rapidly than it is expanding.
The central question, therefore, is no longer whether geopolitical conflicts will push oil prices higher. Rather, it is whether the global economy possesses sufficiently strong demand to transform supply disruptions into a sustained increase in prices. The answer today appears fundamentally different from what it was two decades ago, and this represents the new reality governing global oil markets.
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Why geopolitical shocks no longer drive oil prices
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