Is the Oil Market Integrating a Geopolitical Risk Premium?

Or in other words, is the market permanently incorporating a geopolitical risk premium in its price formation? Since the 1990s, the functioning of the oil market has been based on an implicit assumption: geopolitical shocks are transient. Whether it is tensions in the Middle East, regional conflicts, or temporary disruptions in flows, these episodes have consistently resulted in temporary price increases, quickly absorbed. The war in Iraq in 2003, the Arab Spring in 2011, or the attacks on Saudi installations in 2019 have caused price increases of around 10 to 20%, quickly erased. The market has learned to absorb the risk.

This absorption capacity is based on three pillars: logistical flexibility of flows, the mobilization of excess capacities – estimated today between 3 and 4 million barrels per day, mainly in Saudi Arabia – and, as a last resort, the use of strategic stocks. OECD countries still hold around 1 billion barrels of public and commercial stocks, mobilizable in case of shock. Together, these mechanisms have anchored a price regime in which the geopolitical premium exists, but does not persist.

Strait of Hormuz, the Main Vulnerability Point

But this regime is now being weakened. The Middle East alone accounts for over 48% of proven global reserves, about 30% of production, and most of the excess capacity. Especially, nearly 20 million barrels per day pass through the Strait of Hormuz, representing almost a fifth of global consumption. This triptych – resources, flexibility, circulation – makes the region the heart of the global energy system. But it also makes it the main vulnerability point.

Therefore, the question is no longer just about the occurrence of a shock, but about its perceived likelihood and repetition. Each episode of tension no longer completely disappears from the market’s memory. It leaves a trace, accumulating. It is precisely this mechanism that could mark a regime change.

The Long Memory

Historically, real price shifts have not come from isolated shocks, but from their inability to be forgotten. In 1973 as in 1979, it was not only the physical disruption that transformed the market, but the lasting revision of expectations. The price of oil then integrated a persistent risk premium, reflecting a structurally more uncertain world.

Today, a similar scenario – although perhaps less extreme – becomes plausible.

If current tensions were to persist, the market, even once the current crisis is over, could gradually integrate a lasting geopolitical premium of around 5 to 15 dollars per barrel. This would not necessarily translate into extreme price levels, but into a raising of the implicit floor of oil. The price would no longer be determined solely by marginal costs – often estimated between 50 and 70 dollars for a large part of global production – but by a permanent uncertainty.

This shift would have several implications. Firstly, structurally higher volatility, driven by constant adjustments of expectations. Secondly, a revaluation of energy assets, in a context where supply security becomes central again. Finally, a change in investment decisions, with actors now integrating a geopolitical risk not as transient, but as enduring.

Ultimately, the oil market could enter a new phase: one where price reflects not only the physical scarcity of the barrel, but the fragility of its delivery.

Because in a system where risk no longer disappears, it always ends up being reflected in prices.