Over 20% of the world’s crude oil is not reaching key markets in China, India, Japan and South Korea as the Strait of Hormuz continues to be effectively closed. Iran has disrupted oil shipments through the Strait in retaliation for the bombing campaign launched by Israel and the United States in late February. Although a cease fire remains in effect, peace negotiations are stalled and both Iran and the U.S. continue to blockade the Strait. With no end in sight, key global markets are forcing a fundamental reshaping of how oil is traded globally.

Fundamentally, the who, the how and where global oil supplies are coming from is shifting the oil market away from the Middle East to an unlikely source – North America. Traditional oil sources like Kuwait, Saudi Arabia and the United Arab Emirates (UAE) are unable to ship their oil to Asia and Europe leaving the countries looking for other oil sources to meet their petroleum needs.

Asian countries are over reliant on Middle East oil with Bangladesh, India, Pakistan and the Philippines severely impacted with shortages and high costs for its energy needs. Pakistan has been forced to ration fuel. The Middle East oil producers are also facing an economic crisis because they are unable to ship their oil. Iraq is in extreme crisis because its oil production has dropped by at least 70% since Iran’s attacks in retaliation for the American an Israeli attacks. Kuwait, Qatar, Saudi Arabia and the UAE are also facing disruptions on their oil trade.

Facing the 1973 War Powers Act deadline of having to get congressional approval for continuing the war in Iran, the Trump administration yesterday announced that hostilities with Iran “have terminated.” On April 8, Iran and the United States agreed to an uneasy ceasefire in anticipation of peace talks. Israel later joined the cease fire by halting attacks in Lebanon against Hezbollah positions. Although no new attacks have been reported, peace talks are stalled after both Iran and the United States each blocked the Strait of Hormuz.

Gasoline prices across the U.S. skyrocketed yesterday jumping to $4.39 per gallon, the biggest jump since the ceasefire was announced. Canadians and Mexicans are also facing high gasoline prices with the price of Canadian gasoline hovering around $4.91 per gallon and Mexican gasoline averaging around $5.50 per gallon.

The high price of gasoline has raised concerns among U.S. House Republicans facing midterm elections in November who feel voter backlash will force them to lose control of the House. Forty-two percent of Americans are cutting household expenses due the high cost of fuel. The Trump administration has tried to control rising fuel prices by relaxing Russian sanctions, releasing Strategic Petroleum Reserves and relacing Jones Act requirements that goods delivered to U.S. ports be made by U.S.-flagged ships. It worked for a time, but the Trump administration’s options are limited leading to the spike on gasoline process this week. Republican Party officials fear that if the Trump administration is unable to reign in gasoline prices the American voters will retaliate by voting for Democrat candidates.

As for Iran, its economy also faces serious problems, but indications are that it is likely to hold on longer than the Trump administration. The Iranian government prepared for the eventuality of war by stockpiling supplies and keeping overland trade ongoing during the Strait of Hormuz standoff. Although Iran’s economic situation is bad, its stranglehold on internal dissension and its continuing, if limited, overland trade and stockpiles will likely allow it to hold out longer than the U.S. by the impasse in the Strait.

One of the few options available to the U.S. government is banning oil exports. But the loss of revenues for American companies and the ongoing fuel crisis in other countries make this unlikely, helping to shepherd along the ongoing oil market shift.

The Oil Market Shift

Even if the war were to end soon, the oil market shift has prompted oil consuming countries to diversify to protect them from future oil price shocks.

Before the war started earlier this year, the five largest oil producing countries were the United States, Saudi Arabia, Russia, Canada and China. America, Saudi Arabia and Russia accounted for about 40% of the global oil market last year. When Russia invaded Ukraine in 2022, some countries, namely European countries, started looking for other sources of oil to reduce their reliance on Russian oil in support of the sanctions against the country. Before 2022, about 25% of Europe’s oil needs came from Russia. As a result, Russian oil revenues have dropped from the sanctions and from Ukrainian drone attacks on Russia’s oil infrastructure, with estimates suggesting that Russia has lost $7 billion in oil revenues so far this year.

However, the U.S. government started issuing temporary month-to-month waivers on Russian oil last month to help alleviate the Strait of Hormuz oil crisis. Estimates suggest that waivers have provided Russia a lifeline of revenues of between $2 billion and as high as $4 billion helping to offset the estimated losses this year.

México, one of the top 20 global oil producing nations did not immediately rush to fill the needs of the countries shifting their oil imports away from Russia. Proven Mexican oil reserves rank the country as the 21st in terms of oil reserves globally. But the lack of infrastructure and competition from larger oil producing nations, especially from the Middle East made Mexican oil unattractive to most oil importing nations. Notwithstanding its reluctance and unwillingness to increase its export capacity, México benefited from rising oil prices after the Russian invasion. However, the Iran conflict has changed the global dynamics for North America, including México.

With the Strait of Hormuz effectively closed, México, the world’s 13th largest oil producer and a member of OPEC+, has seen its global visibility increase due to the Iran war and the disruption of oil shipments.

OPEC+

In August 1960, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela created the Organization of the Petroleum Exporting Countries (OPEC) to bring stability to the world’s oil markets. OPEC’s goal was to coordinate oil export policies, ensure a fair price and a steady market for its membership. Starting in the 1940’s and ending in the 1970’s, seven western oil companies dominated the global oil markets. The so-called Seven Sisters included Anglo-Persian Oil, now BP, Royal Dutch Oil, Standard Oil of California, now Chevron, Gulf Oil, who later merged with Chevron, Texaco who also merged with Chevron, and Standard Oil of New Jersey and Standard Oil of New York who are both now ExxonMobile. These seven oil conglomerates dominated the oil trade across all channels, including exploration, refining and transportation allowing them to control oil prices and supply. Their decline in controlling the oil markets came after OPEC was formed.

OPEC’s goal was not to keep oil prices low or high, but instead to keep a stable price point by having the countries agree to the amount of oil they would supply their export markets. OPEC also sought to end oil dominance by western multinationals. Between 1961 and 1969, five additional countries joined OPEC. The five new countries were Qatar, Indonesia, Libya, the United Arab Emirates (UAE).

At its peak, OPEC controlled 56% of the supply of oil. As much as the organization has wanted to control the price of oil on the global market, infighting among its members has made that difficult. However, the Yom-Kippur War demonstrated that OPEC could influence powerful nations like the United States through oil embargos. Although OPEC has never had a monopoly on the global oil markets, its market share allows it to leverage oil through embargos for political purposes.

Some of the original member countries have left the organization over time and others have joined. The current OPEC membership includes Algeria, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the UAE and Venezuela.

In 2016, OPEC and ten non-OPEC oil producing countries plus Russia formed an alliance to manage the global oil supply to stabilize prices. The non-OPEC members include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Oman, South Sudan, Sudan and México. Brazil joined the group last year. The group, along with the OPEC members, are known as OPEC+ today.

The UAE, which joined in 1967, announced this week that it was leaving OPEC on May 11. Before the UAE announced its departure from OPEC, OPEC+ controlled around 50% of the global oil supply. However, the UAE accounts for less than 5% of the global oil supply and although its exit from OPEC has been characterized as a “shocking,” its effect on the oil supply markets is minimal.

Nonetheless, UAE’s departure from OPEC is further proof of the realignment of the global oil markets due to the Iran war.

The Modern Global Oil Market: Fragmented and Political

OPEC and the general oil markets have been political for decades, but they were generally cohesive in pricing and supply chains. However, because of the Iran war, going forward, the global oil markets are now fragmented, and political pressures have increased among the oil producing nations. The exit from OPEC by the UAE is the first of many realignments of the oil markets arising from political pressure points across the globe.

Before the war, global oil trade was mostly globalized. Now it is part of Iran’s asymmetric warfare arsenal to counter American and Israel bombardment. By blockading the Strait of Hormuz, Iran is hoping the economic pressure from the lack of oil to important markets pressures the US to the bargaining table. The U.S. appeared to originally be reluctant to impede Iran’s oil exports until Iran refused to end the war by capitulating on its nuclear programs. Unable to end the war quickly in time for the American midterm elections in November, the Americans also blockaded the Strait to keep Iranian oil shipments from reaching their export markets.

This tit-for-tat oil blockades has forced Middle East oil exporters, as well as Asian and European oil importers to look elsewhere for their oil needs.

The oil market is now more geopolitically controlled than it was before. Oil importing countries are now shifting to non-Gulf oil producers in Latin America and West Africa for their oil needs. But these sources offer limited supplies that along with strategic reserves somewhat mitigates the oil supply shortage from the blockaded Strait.

The Winners and Losers of the Shift in the Global Oil Markets

The biggest winner in the new oil marketplace is the United States. The U.S. is exporting more oil to its allies, and the price increase of oil helps the domestic oil producers. As more allies become dependent on American oil supplies, America can leverage its oil supplies against the countries becoming more reliant on America’s oil.

But America’s oil exports come at the price of higher prices for American consumers. While American oil companies benefit from the exports, the rising cost of oil translates to higher gasoline prices leading to consumer higher prices in almost every economic sector across the nation. It is well understood that the U.S. has a lot of oil, it is not enough to make up the oil bottled up because of the competing blockades. The rise in gasoline prices reflects this reality.

Along with the GOP, two-thirds of Americans believe that the U.S. should end the Iran war quickly, even if it means capitulating to Iranian demands, according to a Reuters/Ipsos poll in February. Another pressure point lies in that American oil companies are reluctant to ramp up oil production fearing losing investments should the Iran war end before they can reap the benefits for their investments.

China is a big winner because it is the only major oil importer to buy Iranian oil at discounted rates during the first weeks of the war. Its oil purchases are helping to keep the Iranian economy afloat during the crisis. China also holds the largest strategic oil reserves in the world.

Other winners include the non-Gulf suppliers that bypass the Strait like Brazil, Guyana and Nigeria are being courted by Asian and European markets looking for oil supplies. They benefit from the high oil prices but carry little geopolitical risk from the volatile oil market.

The biggest losers in the new oil market, in addition to Iran, include the European Union that relies heavily on oil from the Middle East after moving away from Russian supplies in retaliation for Russia’s invasion of Ukraine. Other losers from the shifting oil marketplace include India, Japan and South Korea because of their high dependence on Middle East oil before the war.

Along with the United States, México stands to benefit from the oil market global shift.

A few days ago, Japan and México reached an agreement for México to export one million barrels of crude oil to Japan. This agreement strengthens the energy ties between the two countries. The agreement reduces México’s reliance on a single partner – the U.S. – and provides the country with foreign revenues, in addition to positioning México as a global energy supplier to the Asian markets who depend heavily on oil imports for their economies.

From the North American perspective, regionally, Mexican heavy oil can be used to fill American oil needs allowing the U.S. to export more lighter shale oil to its allies. In effect, including Canada can remake North America into a tighter energy bloc. As the North American energy bloc tightens through greater integration it could lead to North American independence from global oil price shocks the geopolitical use of economic oil price pressures for national purposes.

However, these structural changes are likely to last well after the war leading to fragmented and a politically-charged oil supply chain with chokepoints to pressure political change becoming the norm, instead of the exception.

There is, however, another factor in the global oil supply chain – Venezuela.

The Venezuelan Embroglio

On January 3rd, American forces removed Nicolás Maduro from Venezuela. Venezuela has the world’s largest proven oil reserves, but years of mismanagement, internal conflicts and sanctions has deteriorated its oil production capacity.

Nonetheless, after Maduro’s removal, Venezuela’s oil export volume has doubled from last year. Most of its oil exports are heading to America. The European countries, along with China and India have started to slowly rely Venezuelan oil imports as part of their oil diversification.

But challenges remain with Venezuela’s infrastructure.

However, the Mexican economy faces competitive pressure if Venezuelan oil exports continue to climb, especially if the U.S. invests in rebuilding Venezuela’s oil infrastructure. If the U.S. shifts to Venezuelan oil it would shift foreign investment away from México. México, like other countries, faces economic pressures from rising energy prices caused by the competing blockades in the Strait of Hormuz.

To help offset any shift in American oil imports, the Mexican government is seeking partners like Japan in the hopes of diversifying away from the dependence of American imports of Mexican oil.

All indications are that the global oil markets are transitioning with most countries reassessing where they get their oil, how they get their oil and what oil they import. This realignment comes at the cost of consumer across the globe.

Rising Consumer Prices Will Likely Continue to Dominate Through 2026

The Iran crisis continues to be a multidimensional supply shock to the American economy. In addition to the rising prices of diesel and gasoline, the American economy continues to face uncertainty over tariffs and policy uncertainty from the federal government that effect several sectors of the economy. American consumers are facing the highest inflation rate in almost two years and there is no end in sight to the Iran war, not withstanding the Trump administration’s announcement that hostilities of ended.

But the U.S. gains the most globally from the shifting oil global market post the Iran war. México, on the other hand, will get moderate gains from the oil markets chaos but energy policies and the lack of infrastructure will hamper most benefits to the country. Of the three North American nations, Canada gains the least because of its limited export options and the strong competition from its southern neighbor.

Consumers, however, in North America will likely continue to face rising prices across most sectors of the economy.