World markets were shaken up after oil prices reached record highs following the attacks on oil facilities in Saudi Arabia.
This 20 percent increase is the largest jump in prices since Iraq invaded Kuwait in August 1990.
As is known, oil is one of the most important inputs for production.
Due to their high demand for oil, developing countries that strive for economic growth and want to reach higher GDP face steeper costs due to the rising price of crude oil.
The basic questions that need to be asked here are as follows: will oil prices in the global market jump after the drone attacks? How will the increasing geopolitical risks affect oil prices?
Will oil prices increase?
Saudi Arabia is only second to Venezuela in terms of oil reserves and also second to the U.S. in production.
While Saudi Arabia has a share of 12 percent in the global petrol market, the drone attack has resulted in a 5 percent decrease in oil output.
Prices quickly surged after the short shock of the drone attacks, however they dropped again after it became clear that there wouldn’t be a shortage in the global oil supply.
On the other hand, a possible increase in prices due to the competition among oil producers will lead producing countries to supply more oil to the market which will then consequently contribute to a drop in prices.
Furthermore, the slowdown in world markets has recently led the demand in energy, namely petrol and natural gas, to decline.
This slowdown of demand in energy will offset the rise in prices and alleviate possible aftershocks.
The most important factor is perhaps that the U.S. won’t be able to stomach certain countries, such as Russia and Iran, benefiting from the rise in oil prices.
However, it seems likely that prices will increase to unforeseen numbers due to the fact that it will take time for Saudi Arabia’s damaged facilities to get back up and running and because of possible clashes that could shake the region.
Hence when we take all of the above into consideration, it is more likely that there won’t be great shocks in oil prices.
A new risk for global economies: the geopolitical risk
In the recent period, the effects of geopolitical risks on the global economy have been often expressed.
Geopolitical risks now have the power to directly impact economic growth, export, foreign investments and capital movements between countries.
The fact that the rich oil resources of Gulf countries and 30 percent of the world’s petrol transfers pass through the Strait of Hormuz makes this a strategic region in terms of oil supply security.
Additionally, we are at a period in which the Strait of Hormuz constantly poses a geopolitical risk due to its strategic location which ensures that oil producers in the Middle East are able to reach Asian, European and other global markets.
Hence the struggle to possess a strategic position in the Middle East poses a significant risk for global markets and also increases regional conflicts.