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Why oil markets shrugged at the US bombing of Iran

Monday, 14 July 2025 | 00:00

What if I told you the United States would bomb Iran and oil markets would (mostly) shrug? And what if I told you that it happened in the context of broad sanctions on Russian oil exports , incredibly high economic policy uncertainty , and the most active armed conflicts across the globe since the end of the Cold War?

Prior to the past decade or so, any geopolitical analyst worth their salt would have scoffed at such a claim. Since the Persian Gulf became the locus of global oil production in the 1970s, and with vastly more export potential than incumbent producers like the United States, any hint of instability in the region would stoke fears of supply disruption and send prices spiraling.

But since the 2010s, three fundamental shifts in energy markets have radically altered the risk premium associated with crude oil markets: the resurgence of Western Hemisphere production and exports, China’s emergence as an importer of last resort, and a painful lesson internalized by Middle Eastern producers—that weaponizing oil can be self-defeating.

The dog that didn’t bark—US-Iran conflict and oil markets
On June 22, 2025, the United States used B2 bombers and Tomahawk cruise missiles to attack three Iranian nuclear facilities.
Damage to the three sites was extensive, but reports conflict as to just how large a setback the attacks were for Iran’s nuclear program. The strikes came after a breakdown in US-Iranian shuttle negotiations over Iran’s nuclear program, which Iran claims is for civilian purposes but most observers see as part of a multi-decade program to develop nuclear weapons. In late May, the International Atomic Energy Agency (IAEA) announced Iran’s stockpile of enriched uranium had grown to an unprecedented level.

The US attacks came after Israel had launched its own offensive a week earlier. On June 12, the IAEA formally declared Iran in breach of its obligations under the Treaty on the Non-Proliferation of Nuclear Weapons.

The next day, Israel launched a multipronged attack on Iran’s nuclear program that included strikes against nuclear facilities and targeted assassinations of military leaders and nuclear scientists . Israel’s direct attacks on Iran came nine months after Israel had inflicted heavy casualties on Hezbollah, a Lebanese Shia militia and client of the Iranian regime, during what’s come to be called “Operation Grim Beeper.”

Almost immediately, headlines began to speculate
that the US attacks —the first direct attacks on Iranian assets in Iranian territory and airspace since Operation Praying Mantis in 1988—and the anticipated Iranian response would cause oil markets to spike. This did not happen. Israel’s June 13 strikes caused oil prices to climb 7.1 percent on June 13, but oil actually closed down on June 23, the first day of trading after the US attack. By Friday, June 27, oil was back trading at around $65 per barrel.

In explaining the non-spike, analysts have been quick to focus on well-stocked markets and an uneasy demand outlook, Iran’s decision not to close the Strait of Hormuz (and mild direct response to the United States), and the general softening of oil markets as the Northern Hemisphere heads toward fall. And these explanations are probably all correct. But they raise as many questions as they answer: Why are markets so well stocked? And why was Iran—hardly a stranger to weaponizing oil—unwilling to do so?

The rise of geopolitically “safe” Western Hemisphere exports
If we wind back the clock to 1978—the eve of the Iranian Revolution and the resulting 1979 oil crisis—the Soviet Union, Middle East, and Africa accounted for 100 percent of global oil exports, with the Middle East accounting for 69 percent. And since Soviet oil was not widely traded in Western markets, the oil-hungry advanced economies were particularly dependent on Middle East exports.

Fast forward to the 21st century, and the situation has changed. The former Soviet Union, the Middle East, and Africa now only supply a little over half (52.5 percent) of global output and 83.5 percent of exports. The Western Hemisphere, which accounted for only 26.6 percent of global production in 1978, now (2024) accounts for nearly 37 percent—and more importantly 16.5 percent of global exports.[2] Beginning in the late 2000s (figure 1), the North American shale oil and gas revolution and US energy exports, large discoveries in and exports from Guyana, and Brazil’s increased offshore output have fundamentally changed the geography of production in ways that have eroded the Persian Gulf’s commanding position in global markets.

This development has changed oil markets in two key ways. While the Middle East still dominates global exports, the Western Hemisphere, though not without conflict hotspots in Colombia, Venezuela, and Haiti and political polarization in the United States, is much more politically stable than other net-exporting world regions .[3] More exports are flowing from comparatively “safe” producers. Second, the Gulf states—including the members of the Gulf Cooperation Council and Iran—and members of the Organization of the Petroleum Exporting Countries (OPEC) more broadly have significantly less leverage than they had in the past, with their share of total production falling from 44 percent in 1978 to 34 percent in 2024. One of the reasons oil markets were so well stocked at the outset of the current US-Iran conflict was OPEC’s decision to ramp up oil production in the face of a deeply uncertain global demand outlook. OPEC is no longer in a position to collectively manage (some would say manipulate) prices because they no longer control markets to the extent they did previously.

China as the purchaser of last resort
At present, Iran, the Russian Federation , and Venezuela—which collectively control 33 percent of proven global oil reserves—are all under significant Western sanctions. In 1978, the members of the Organization for Economic Cooperation and Development (OECD) consumed 70 percent of global supply, so sanctions by this group of Western states would have been much more impactful both for sanctioned economies and global markets. But by 2024, that share had fallen to 44 percent. This shift has been driven by rapid demand growth in emerging markets, none more important than China. China’s speedy economic ascent in the past three decades has taken its share of global consumption from 2.6 percent in 1978 to 16.1 percent in 2024—and China is deeply import-dependent, with insignificant domestic resources or reserves.

As a non-participant in Western sanctions, China is free and willing to consume oil exports from broadly sanctioned economies. China consumes 90 percent of Iranian exports, a significant share of Venezuelan exports , and uses non-official channels to import Russian crude (and settles payments in rubles or yuan) . What is emerging is a bifurcated system similar to that during the Cold War, with these sanctioned economies helping meet massive Chinese demand in the same way the Soviet Union supplied the Communist bloc. In decades past these sanctions might have radically constrained global supply. But with China as a purchaser of last resort, they do (and have) not. And every barrel imported from the Orinoco Belt or Western Siberia is a barrel for which China does not have to rely on Middle East exports more broadly.

Lifelines make lousy weapons
The third significant change has been the internalization on Iran’s part—and more generally by Middle Eastern regimes—that using oil as a weapon is ultimately self-defeating. This was not self-evident in the 20th century. Having become the pivotal actors in oil markets by the 1970s, the Arab states embraced oil as a weapon in 1973, choking off supply, and threatened to do so again numerous times in subsequent years. In the 1980s, the Iran-Iraq war saw both countries seek to undercut the other’s war effort by attacking oil infrastructure and tankers.
Predictably, these developments—along with the Iranian Revolution in 1979—were key drivers of diversification, as exploration effort and capital flowed to comparatively safe geographies.

All of this was occurring in the context of rapidly growing global demand (figure 2). In the 1960s and 1970s, global oil demand grew at an average annual rate of 5.4 percent. Under these conditions, a tanker of exports forgone today was a tanker of exports that could reliably be exported tomorrow (and potentially at higher prices). Demand growth slowed in the 1980s—in large part due to the effects of the 1979 crisis and the tanker wars on global economic output. But demand picked back up during the 1990s and early 2000s, the period that will be remembered as the apex of late 20th–early 21st century globalization.

Things began to change in earnest around the time of the Global Financial Crisis (2008–10). The demand outlook soured, and the US shale boom began. By the 2020s, the rise of Western Hemisphere production was accompanied by a rapid rollout of renewable energy investment and infrastructure, to the extent that fears over peak oil production have been replaced by those over peak oil consumption.

Today, weaponized energy exports are being countered by diversified supply and renewable alternatives. Iran’s threats to close the Strait of Hormuz were undercut by the fact that Iran’s economic survival now hinges on access to one buyer: China. Disrupting traffic in the Strait of Hormuz would alienate that buyer, and in a context of soft demand (and anticipated demand growth), buyers have more power.

Wither the Middle East risk premia?
Oil markets barely flinched at US strikes on Iran, thanks not just to near-term factors but to the three deeper shifts: geopolitically safer Western oil production, China as a buyer of last resort, and producers learning that oil is a double-edged sword.

None of this means global oil markets are fully indemnified against instability in the Middle East. If Iran were to close the Strait, or Israel or the United States were to target Iran’s export terminals, markets would react quickly. But these three structural changes, along with a better understanding of what actually constrains supply (direct attacks on infrastructure, blockades of shipping lanes, etc.) and demand maturity in the West, mean the bar for Middle East instability triggering an oil price crisis has been set much, much higher than in the past.
Source: PIIE

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