From “we are debating” with Israel a possible bombing of Iranian oil facilities to “if I were in your place, I would think about other alternatives to attacking oil wells”, in just 24 hours. The rhetorical turn of the President of the United States, Joe Biden, between last Thursday and Friday was eloquent: with the Middle East on fire, he went from encouraging to discouraging an option that was heating up—and in what way—the oil market. An escalation that, if prolonged, would threaten to undermine the electoral prospects of his vice president and Democratic candidate, Kamala Harris, and would benefit his nemesis, the Republican Donald Trump.
Until now, the year of war in the Middle East had had little impact on oil prices. The markets had barely moved in the face of the bombings in Gaza that have left nearly 42,000 Palestinians dead and destroyed the Palestinian Strip. A stark contrast to what had happened a year and a half earlier, when the beginning of the Russian invasion of Ukraine sent energy prices to stratospheric levels. In the United States, that huge jump gave rise to unleashed inflation, which has taken two years to come under control and which has contributed to sinking Biden’s popularity. But Gaza has no oil.
Iran, against which Israel is considering retaliation after the attack with more than 180 missiles last week, yes. It is the seventh largest producer in the world, with nearly four million barrels per day. Its weight is such that any alteration in its supply abroad—or even a mere threat of disruption—would have a dent in the world market. An impact that would also reach the suppliers of the United States, despite the fact that this country does not consume a single drop of Iranian crude oil.
The prospect that the recent escalation on the Israeli-Lebanese border could turn into a war that drags down Tehran, and even the United States, was already generating some nervousness in the markets: before the Iranian attack against Israel, the Brent had jumped 4% in a few hours. In this breeding ground, Biden’s ambiguous comment on Thursday, in which he seemed to approve a possible attack by Israel against Iranian oil infrastructure, unleashed hysteria. In the hours immediately following his sentence, the price of West Texas Intermediate (the reference in the US) rose 5.5%.
The president had to back down almost immediately. On Friday he took an unprecedented step for him: he appeared by surprise and for the first time in his mandate in the White House press room to answer journalists’ questions. There he was much clearer in his response. And much more orthodox. “The Israelis have not determined what they are going to do about an attack. That is being debated. If I were in your place, I would think of other alternatives to attacking oil wells,” he declared.
With the electoral race tight, hanging by a thread in a handful of swing states, an increase in fuel prices would have been a torpedo in the Democrats’ waterline. Both in the race for Congress and the Senate and, above all, for the presidency. In a country that moves predominantly—except in some large cities—by car, the price displayed on gas station signs has as much or more impact on elections than any other purely political variable. Its variations are the great reference that the average American clings to to assess whether or not the economy is on the right track.
“Low gasoline prices are in the general interest, something that Republicans and Democrats want,” Jim Burkhard, vice president of the analysis firm S&P Global Commodity Insights, recently summarized. “And the president, regardless of party, is usually seen as responsible.” A perception that, on the other hand, has little to do with the reality of the market: the retail cost per gallon (3.7 liters, the measurement used in the United States) depends, to a large extent, on the price of crude oil in the international markets. “Something that no one can control, not even the president of the United States.”
A study by Jon Krosnick, Laurel Harbridge and Jeffrey Wooldridge, from the universities of Stanford, Northwestern and Michigan, estimated the loss of support for the presidential candidate at six tenths of a percentage point for every ten point increase in the price of crude oil.
No impact yet on gas stations
Although substantial, the rise in the price of crude oil has not yet been transferred to the pumps. And it does not seem, in short, enough to make a dent in the course of the campaign. At least for now. The price of gasoline in the United States is today slightly above three dollars per gallon, with some States below, according to the latest update from the Energy Information Administration (EIA). It is helped by the drop in demand that usually occurs in the fall months, after the summer holidays and before the Thanksgiving festivities – this year it will be on November 28 -, put Americans back in traveler mode.
New alterations in prices would almost certainly truncate the options of leaving that level behind. Light years away, yes, from the all-time high of June 2022, four months after the start of the war in Ukraine and when the king fuel of the American automobile fleet reached an average of almost five dollars per gallon.
In October of that year, just three weeks before the midterm legislative elections, Biden already chose to release 15 million barrels of crude oil from US strategic reserves. The time was different—at that time, inflation was a hole in the pocket of the average American—but the backdrop was the same: gasoline weighs heavily on a candidate’s chances of victory.
Risks
An Israeli attack on Iranian oil facilities would skyrocket the price of oil. This is what happened, in fact, in the first hours after Biden seemed to give free rein to Benjamin Netanyahu’s government. Not only because Iran is the seventh largest producer in the world and the third in terms of reserves, but because it would mean the departure of thousands of barrels of crude oil from the world market for the first time since the start of the conflict in the Middle East, a year ago.
“An important consideration will be whether Saudi Arabia increases production if Iranian supplies are disrupted.” [lo que reduciría la presión sobre el precio]. As a rule, a 5% increase in oil prices adds about 0.1 percentage points to base inflation in advanced economies,” James Reilly, senior markets economist at the consulting firm Capital Economics, noted last week.
There is more. The backdrop is a latent fear that the conflict will end up leading to the closure of the Strait of Hormuz, controlled by Iran. That move, although risky also from Tehran’s point of view – it is key to releasing its own production, especially towards China – would leave the bulk of Saudi, Emirati and Kuwaiti crude oil out of play. And it would lead, then, to a serious price crisis in the oil market. A scenario, although currently remote, that would skyrocket the cost of gasoline throughout the world. And that, in a purely American way, would seriously damage Harris’ chances of victory. Benefiting, of course, Trump.