If one has been paying attention to global headlines lately, it would be easy to assume that oil prices would be through the roof: a country with significant oil reserves mired in a crisis, sanctions on perennial producers, simmering regional conflicts and social unrest in several exporters. And yet Brent and WTI have been languishing around $60 a barrel, a level that, a decade ago, most analysts would have dismissed as impossible under such conditions.
What is happening?
At first glance, the logic of oil pricing should be simple: supply risk should mean higher prices. But today’s market tells a very different story, one in which geopolitical shocks do not automatically translate into price shocks.
The changing nature of supply risk
Take Venezuela as an example, the example of dysfunctional oil production. With the world’s largest proven crude oil reserves, one would expect its political upheavals to roil the markets. In reality, Venezuela’s production has already been reduced after years of mismanagement, sanctions and capital flight. What traders care most about is not reserve totals, but actual barrels available to buy, ship, refine and burn. Caracas no longer significantly influences global supply balances. This is also unlikely to change with US intervention, as companies need a stable regime to operate. That is very far away in Venezuela.
Meanwhile, traditional flashpoints like Russia and Iran are constrained more by sanctions than by geology. Their exports find buyers, but often with deep discounts and under complex legal and logistical solutions. In recent decades, oil markets have learned to value sanctions as part of the foundation, not an extraordinary disruption.
Demand is the new wild card
What is really different now is not only the supply, but the behavior of demand.
A decade ago, growth in oil demand was almost a given. Emerging markets industrialized en masse; the demand for transportation fuel increased inexorably; Industrial energy use advanced. Today, that certainty has been fractured. Efficiency increases, vehicle electrification, alternative fuels and regulatory pressures have altered the trajectory. Even in markets where oil demand has not peaked, it is stagnating or, at best, growing slowly.
In today’s world, marketers don’t just ask: “Will supply be reduced?”
More and more people ask: “Will demand growth weaken before supply actually shrinks?”
That change matters. A possible drop in consumption, driven by the adoption of electric vehicles, fuel efficiency and energy transition policies, inhibits prices much more than any supply disruption alone.