Geopolitical tensions of the

Middle East: Explore the

change of guard in the United
States and the political future
of the Oil Economy

IMI, New Delhi

Authored By: Agrima Singh

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Geopolitical tensions in the Middle East have long been a significant determinant of
global oil market dynamics. The region's vast oil reserves and production capacities
mean that any instability can have far-reaching implications for the global economy.
Recent developments continue to underscore this intricate relationship.

U.S.–Saudi Relations and Oil Diplomacy

The evolving relationship between the United States and Saudi Arabia plays a pivotal
role in shaping oil market trends. In 2025, U.S. President-elect Donald Trump and Saudi
Crown Prince Mohammed bin Salman (MbS) face conflicting goals but also
opportunities for mutual benefit.
Trump aims to exert "maximum pressure" on Iran, risking a rise in oil prices, while
MbS wants to stop sacrificing revenue by underproducing oil but fears a potential market
crash. Despite their differences on Iran, Palestine, and oil production, Trump and MbS
could work together. Recent interactions, including Trump's attendance at an event with
Saudi investment fund chief Yasir Al-Rumayyan, hint at warmer relations. The U.S.,
being the top oil producer, may align with Saudi interests if Trump imposes effective
sanctions on Iran, causing oil prices to spike and allowing Saudi to increase its market
share. Investing in each other's economies could further strengthen their ties, aiding
Saudi's Vision 2030 and increasing U.S. foreign direct investment in Saudi Arabia.

Key Points:
 U.S. Sanctions on Iran: Potential for increased oil prices, benefiting Saudi
market share.
 Economic Investments: Mutual investments could bolster economic ties and
influence oil market strategies.

Middle East Conflicts and Oil Supply Stability

Ongoing conflicts in the Middle East, particularly involving Iran, Israel, and other
regional players, have historically led to concerns over oil supply disruptions. The
potential for a further escalation of conflicts in the Middle East means oil prices could
see an increase up to USD $100 or even USD $125 per barrel.

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Key Points:
 Supply Disruptions: Escalating conflicts can lead to significant oil supply
interruptions.
 Price Volatility: Market reactions to geopolitical tensions can cause substantial
price fluctuations.

Global Economic Implications of

Middle East Tensions

The Middle East's geopolitical landscape

has profound implications for the global
economy, particularly through its impact
on oil prices. Research indicates that
higher geopolitical risk raises oil prices,
reduces global investment, and increases
inflation.

Key Points:
 Investment Reduction: Elevated geopolitical risks can deter global investments.
 Inflationary Pressures: Increased oil prices contribute to global inflation.

Market Responses to Middle East Uncertainties

Despite heightened tensions, oil markets have sometimes exhibited muted responses,
reflecting complex market dynamics. For instance, with escalating Middle East tensions
involving Iran, the geopolitical risks are high, yet oil, gas, and LNG market responses
remain muted.

Key Points:
 Market Resilience: Oil markets may not always react sharply to geopolitical
tensions.
 Supply Considerations: Factors such as global supply levels can influence
market reactions.

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Historical Context of Middle East Conflicts and Oil Prices

During the Yom Kippur War, Arab oil-producing countries used oil as a strategic tool to
pressure Western nations into influencing Israel. Supported by the Soviets, members of
the Organisation of Petroleum Exporting Countries (OPEC) reduced oil production and
imposed embargoes on nations considered "unfriendly," particularly Europe and the
United States, which relied heavily on external oil sources for nearly two-thirds of their
energy imports. Between October and December 1973, the price of crude oil surged
fivefold, triggering the first global oil crisis. This crisis intensified inflation, with the UK
experiencing an annual inflation rate of 20%, and drained the wealth of oil-importing
nations, contributing to massive budget deficits and sparking a broader economic
downturn.
From the 1960s onward, oil consumption steadily increased, overtaking coal and natural
gas as the dominant energy source. Between 1950 and 1972, oil consumption doubled,
accounting for more than 60% of global energy use. The oil embargo of October 1973
further exacerbated the economic difficulties in Western Europe, leading to a sudden
recession that ended the post-war period of economic expansion known as the “thirty
glorious years.” This downturn caused a significant decline in industrial production,
severely impacting key sectors such as textiles, shipbuilding, and steel. International
trade slowed, and bankruptcies became frequent.
The recession and subsequent austerity measures caused a sharp rise in unemployment
across Europe, which was further worsened by the second oil crisis in 1979. The impact
of these crises varied across countries. Industrial economies like Belgium and the United
Kingdom struggled to adapt, experiencing higher unemployment. In contrast,
Luxembourg managed to avoid widespread job losses through collaborative efforts
between labor and management, alongside state subsidies for the steel industry, funded
by tax revenues from its banking sector.

Historical events have demonstrated the sensitivity of oil markets to Middle Eastern
geopolitical tensions. Geopolitical tensions in the Middle East have historically triggered
significant oil price spikes.

Key Points:
 Historical Precedents: Past conflicts have led to significant oil price increases.
 Market Sensitivity: Oil markets remain highly sensitive to Middle Eastern
geopolitical developments.
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Future Outlook and Potential Scenarios

The future outlook of the Middle East crisis, particularly concerning oil, is likely to be
shaped by ongoing geopolitical tensions, U.S. policies, and regional power dynamics.
Oil will remain a key leverage point in global diplomacy, with potential disruptions in
supply continuing to affect global markets. U.S. involvement, while shifting, will still
influence energy security through sanctions, military presence, and economic alliances.
As tensions rise, oil prices may remain volatile, and the U.S. could face challenges
balancing energy independence with its geopolitical interests, especially in relation to
Iran and its allies. The scenario could lead to further economic instability, particularly
for oil-dependent countries.
The potential for a further escalation of conflicts in the Middle East means oil prices
could see an increase up to USD $100 or even USD $125 per barrel.

Key Points:
 Price Projections: Escalating conflicts could drive oil prices to unprecedented
levels.
 Global Economic Impact: Significant price increases could have widespread
economic repercussions.

Conclusion
The Middle East remains a cornerstone of the global oil economy, where geopolitical
tensions profoundly influence oil prices, supply stability, and global economic trends.
The interplay of regional conflicts, U.S.
policies, and evolving power dynamics
creates a fragile equilibrium that can easily
be disrupted. Beyond its immediate
economic implications, an escalation of the
Middle East conflict could trigger large-
scale displacement of people, which would
increase economic and social pressures on
neighbouring countries. Many countries
may also have to increase their military
spending in response to growing regional
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tensions.

Key Observations:
 Historical Sensitivity to Instability:
o Events such as U.S. sanctions on Iran, conflicts in Syria and Yemen, and
trade wars have shown how geopolitical tensions impact oil markets.
o The oil market remains highly sensitive to disruptions in the Middle East.
 Shifting Global Influence:
o Perception of U.S. withdrawal has created power vacuums.
o Regional powers like Saudi Arabia, Iran, Turkey, and Israel compete for
influence.
o Russia has reasserted itself in the region, while China’s economic
engagement is steadily growing.

 Oil Price Volatility:

o Geopolitical risks, particularly fears of supply disruptions, continue to drive
oil price fluctuations.
o Escalating tensions could push oil prices to extreme levels, impacting
inflation and slowing global economic growth.
 Interconnected Energy Security:
o Global economies remain tied to Middle Eastern oil production despite
diversification efforts.
o Stability in the region is critical for energy security and global economic
resilience.
Future Outlook:
 Greater collaboration between global powers and regional actors is essential to
prevent further destabilization.
 Balanced diplomacy, strategic investments, and effective conflict resolution will
play a key role in stabilizing the region.
 Oil-dependent nations and industries must adopt adaptive strategies to address
immediate risks and long-term challenges.

In conclusion, the Middle East’s role as the heart of the oil economy remains
irreplaceable. Its stability holds the key to ensuring energy security, economic resilience,
and sustained global growth in an increasingly volatile world.

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References:

https://www.worldbank.org/en/news/press-release/2024/10/29/commodity-markets-
outlook-october-2024-press-release

https://www.csis.org/analysis/experts-react-energy-implications-escalating-middle-
east-conflict

https://www.cvce.eu/en/collections/unit-content/-/unit/df06517b-babc-451d-baf6-
a2d4b19c1c88/548d2b44-a4f0-460e-a26d-999028832012