The world's most unpredictable variable

The Strait of Hormuz isn't the only thing that will keep oil prices volatile

Prices of crude oil are back at around $100 a barrel now, after the war between the United States (US) and Iran, which some had hoped was dying down, once again escalated into open strikes on each other over the past few weeks. It had stayed between $80 and $90 over August. But this sort of swing is not unusual any more; the oil and gas market is more unpredictable today than it has been for decades – driven by multiple overlapping trends.

 

Naturally, the biggest and most unpredictable trend is the behaviour of populists and authoritarians. The initial shock came from Russian President Vladimir Putin’s decision to invade Ukraine in 2022, which sent prices of natural gas through the roof across the world. But, even so, a sort of hard-won stability seemed to have returned till, earlier this year, US President Donald Trump – with equally poor foresight – decided to launch a war of choice on Iran. In both cases, the aging leaders, either isolated or gullible, seemed to imagine that the other side would be unable to fight back and the ensuing war would be quick. In addition, Mr Putin doesn’t seem to have factored in broad and long-lasting sanctions against Russian oil and gas exports.

 

But it was not as if the markets were working too well even when some world leader wasn’t deliberately disrupting them. At the end of 2024, for example, most estimates of the price of oil over the course of the next year were that it would be about $75 a barrel; in fact, it was $68. But it does get worse when the politicians make their big mistakes; the expectation for 2026 was around $61, but futures over the course of the year have threatened to reach double that figure.

 

But, even aside from the restrictions on the Strait of Hormuz that Iran has put in place, and the continued difficulty that Russia is facing in getting its oil and gas on the market – and, now, the possible closure of the Red Sea as well, thanks to the Houthis – there are multiple other complications that forecasters have to take into account.

 

For one, nobody quite knows what’s going on with China’s oil demand. That oil prices haven’t gone stratospheric since the Iran war started is partly because demand from the mainland has been far lower than expected, and nobody knows why. In the second quarter of the year, it reduced its imports by about 3.5 million barrels of crude oil a day, approximately a 30-32 per cent fall as compared to the equivalent period in 2025. Some assume this means that it has commercial and strategic inventories of crude oil, which are far vaster than was previously assumed. (This also, incidentally, impacts how long it might be able to carry on a war of its own, and reduces the power of old arguments that claimed cutting off its imports at the Strait of Malacca would strangle it.) Others see this as it moving to take advantage of the broad electrification of its economy, or opening up new ways to import Russia’s otherwise “missing” oil and gas. Either way, nobody knows how long it can keep on suppressing imports – or if one of the consequences of this current period of strategic demand destruction is permanently lower oil import demand from the mainland.

 

Multiple other factors will have to be taken into account going forward. For one, the big stabiliser in the oil markets for the past decades has been the Organization of Petroleum Exporting Countries, or Opec. That’s already been in trouble, given that it didn’t include some of the countries that have turned into big exporters since it was set up in the 1970s – such as the US. But even worse, perhaps, was news that the United Arab Emirates was leaving Opec earlier this year. This leaves the Saudi Arabia-dominated bloc with considerably less power to set prices going forward.

 

But it still retains considerable influence over prices and has a target that affects the global clearing price. But what is that target? It will, presumably, be determined by the future course of Saudi Arabia’s own internal politics. How much money can it continue to spend on an underperforming military and quixotic infrastructure dreams along the Red Sea? The latter have been sharply cut back, but other demands on Riyadh’s purse are taking its place. The priority, however, will be to extend the various ways that the Kingdom transfers income to its citizens – given that political stability may well depend upon the extension of its welfare state. The estimates of how much Saudi Arabia needs oil prices to be in order to balance its budget vary sharply: In 2023, the International Monetary Fund (IMF) thought the price needed to be $80 per barrel; in 2024, the same source thought it was closer to $100; and in 2025 the IMF was estimating $90.

 

Then there’s the possibility that other sources of oil will come back online. If a deal with Iran is struck, then obviously the markets will not only see the Strait of Hormuz allow Arab oil out, but may mean that Iranian oilfields pick up to levels not seen for more than a decade. But even more interesting is Venezuela. Prior to its economic collapse and isolation, the South American exporter was producing more than three million barrels a day; exports were down to below 800,000 barrels a day in 2025. What, precisely, lies behind the new deal that Mr Trump has imposed on the country? Another million or so barrels a day leaving the country will have a meaningful effect on prices.

 

All of this, of course, ignores several other factors – not least the possibility that the current crisis will accelerate the shift away from crude oil towards other forms of energy, whether renewables or nuclear. This may take decades to fructify, but we may see effects of the shift much sooner than that.

 

India has survived the current turbulence better than most countries. But the fact remains that the two variables most capable of influencing its economy for better or worse are the quality of the monsoon and the price of oil. Somewhere in New Delhi, there are officials responsible for determining what the Union Budget should assume is the price of oil in 2027. The one thing we can be sure of is that, for no fault of their own, they’re going to get it wrong.