Where Oil Prices Stand
WTI crude climbed back above $90 a barrel. Brent is approaching $100. The latest fighting - Yemen's Houthis attacking Saudi oil facilities - widens this war in a real way. Oil at $90 is still tolerable for the global economy. But too much time spent above $120 a barrel would weigh heavily on the world economy, and past that point all bets are off.
The Safety Valves Holding Prices Down
Two main buffers have kept a lid on prices, and neither lasts.
First, Saudi Arabia redirected much of its oil flow on the supply side. Instead of sending barrels south through the Strait of Hormuz, it moved them west to the Red Sea, then either out to the south or north to the Suez Canal pipeline.
Second, China cut its crude imports sharply once the war began, dropping fast starting in June.
Together these two moves helped hold prices down, but they cannot hold in the long run. The bigger danger is the Houthis taking out Saudi oil facilities. That shifts the problem from logistics to actual lost production capacity.
The Math on Lost Barrels
Before the war, about 15 million barrels a day of crude moved out through the Strait of Hormuz. Market signs suggest roughly two-thirds of that still reaches market by other means - partly because tankers move "dark" through the strait, turning off transponders and phones so they show no electronic signals.
Saudi Arabia alone accounts for about 7 million of those 15 million barrels a day. Looking at where spare capacity sits, there is no real way to replace the loss of a large chunk of that 7 million. It is still too early to know how long the Saudi outages will last. But if they matter at all, then $100 a barrel is just a speed bump.
The Producer Paradox and the Tipping Point
High oil prices help producers for a while, then turn into a net negative for the whole economy if they persist. Think of a six-year-old eating too much sugar: the high feels great, then the child crashes.
The record high was about $147 a barrel, set in July 2008. From there prices collapsed to about $35 a barrel by February 2009. That pattern can repeat. A sharp breakdown in the global economy - which very high oil prices can cause - risks that same collapse. Exploration and production companies (E&Ps) look attractive when oil is in the $80, $90, or low $100 range. Above that, too much of a good thing becomes a bad thing.
Most oil producers would call $85 to $90 a barrel their sweet spot. Push much above that and everyone gets nervous.
At what price should we start worrying about a recession? Spending more than a couple of weeks north of $120 a barrel risks setting off a recession. As a rough rule, every $10 to $15 rise in the price of oil knocks about 0.1% off GDP. It would not take long to reach a point where GDP turns negative.
How Fast $100 Oil Hits Consumers
A typical tanker route from the Arabian Gulf to the Middle East or North America takes 3 to 4 weeks of travel time. So high prices from today's fighting in the Gulf show up at the pump three or four weeks later.
Diesel buyers are already paying steep prices. The crude side has been bad, but diesel is worse. Refined product that would normally reach market - notably from Russia - is no longer flowing, because Ukraine's attacks on Russian oil refineries pushed Russia to impose a blanket export ban on diesel. Truckers and others already pay very high pump prices for diesel, and gasoline could be next if crude climbs much further.
The One Signal to Watch
The best outcome would be a deal between Iran and Oman over the Strait of Hormuz. Iran controls the north side of the strait; Oman controls the south. A deal would likely need a variable payment to both parties - something the market was not used to before, but on the order of a dollar a barrel to allow normal flow through the strait. That would go far toward calming the market.
Without such a deal, the questions are how well Saudi Arabia can keep redirecting oil away from the strait, and whether it can protect its facilities - a brand new question traders are now trying to size up. Iran and Oman reaching a deal would free up a large number of barrels and lower the temperature.
