[New York Diary] Harris Smiles at America's Oil Power

The situation in the Middle East, often referred to as the powder keg of the world, is deteriorating further. Since the attack on Israel by the Palestinian militant group Hamas in October last year, the conflict has expanded to include Iran and the Iran-backed Lebanese militant group Hezbollah. This has raised concerns that these localized skirmishes could escalate into a fifth Middle East war. In particular, the conflict between Israel and the anti-Israel bloc in the Middle East has reached an extreme, especially after the Israeli military recently conducted an airstrike in Beirut, Lebanon, targeting and eliminating Hezbollah's top leader, Hassan Nasrallah.

What is unusual is that, despite these heightened tensions, international oil prices have actually declined and remained stable. At the end of September last year, Dubai crude oil from the Middle East was around $93 per barrel, but by the end of September this year, it had dropped to about $73, a decrease of more than 20% year-on-year. This is the lowest price in the past year. West Texas Intermediate (WTI), which forms the basis for U.S. oil prices, also fell from around $91 to about $68 during the same period. The long-standing “oil price formula” of the past 50 years, in which instability in the Middle East leads to rising oil prices, does not seem to apply this time.

There are several reasons why international oil prices are remaining stable, unlike in the past. First, concerns about declining oil demand due to forecasts of a global economic downturn, including in the United States, are being cited. On September 18 (local time), the U.S. Federal Reserve implemented a “big cut” by lowering the benchmark interest rate by 0.5 percentage points, prompting some to voice concerns about a recession. Most experts had expected a 0.25 percentage point cut in September, so this unexpectedly bold rate cut has been interpreted as a signal that concerns about a rapid cooling of the labor market and a recession are growing.

The cooling of China’s real estate market and the so-called “common prosperity” policy, which is tightening regulations on growth industries, are also fueling fears of an economic downturn. The Manufacturing Purchasing Managers’ Index (PMI), a key indicator of China’s manufacturing sector, has pointed to contraction for four consecutive months through August. The People’s Bank of China recently lowered the reserve requirement ratio by 0.5 percentage points in an effort to boost domestic demand. These concerns about economic slowdowns in both the U.S. and China are leading to expectations of reduced oil demand.

The increase in U.S. oil production, including through shale oil extraction, has also contributed to the stability of international oil prices. According to the U.S. Energy Information Administration (EIA), the average daily crude oil production in the U.S. reached 12.92 million barrels last year, is expected to reach 13.21 million barrels this year, and could increase to 13.44 million barrels next year. The International Energy Agency (IEA) reports that the U.S. accounted for about 80% of the increase in global oil supply last year. In effect, the U.S. is offsetting global oil supply chain instability caused by Middle East tensions with explosive increases in its own oil supply.

These low oil prices are expected to work in favor of the Democratic Party in the U.S. presidential election scheduled for November. The general rule in elections is that difficult economic conditions benefit the opposition party, while favorable conditions benefit the ruling party. In the U.S., where public transportation is underdeveloped and the country is vast, driving is essential. This is why Americans are highly sensitive to gasoline prices. Earlier this month, during the Labor Day holiday, pro-Democratic media outlets such as CNN indirectly supported the Democratic Party by reporting that the number of holiday travelers hit a record high thanks to lower gasoline prices over the past year.

Wall Street predicts that oil prices are likely to remain around $70 per barrel going forward. Citigroup has even suggested that prices could fall to $60 next year. Since shale oil companies need oil prices to exceed $50 per barrel to be profitable, maintaining prices around $70 is advantageous for the U.S. in terms of oil supply and demand as well as the development of its domestic oil industry.

Currently, former President Donald Trump, the Republican candidate, may be hoping for a spike in oil prices in the coming month. However, as the influence of Middle East tensions on international oil prices has diminished and the U.S. has gained greater power in the global oil market, the current trend in oil prices appears to favor the Democratic candidate, Vice President Kamala Harris, at least until the election. Judging by oil price trends alone, it makes sense to bet on a victory for Harris.