Ananta Insights | Middle East and Current Geo-Economics of Oil | Ambassador Mahesh Sachdev | August 2025

Introduction:

Being the largest source of crude, the Middle East region has had a strong symbiotic relationship with it.  This correlation, however, appears to have slackened off late: although both crude and the Middle East have been buffeted by strong turbulences in recent months for their respective reasons, these tendencies have remained largely mutually exclusive. The global oil economy has been on a roller coaster due to myriad impetuses such as the Shale revolution,  formation of OPEC+, Covid-19, Climate Change, Renewables, economic sanctions on Russia, Iran and Venezuela, and Tariff Wars. These have caused the price of the world’s most traded commodity to gyrate from near zero to over $140/barrel without upending the Middle East stability. At the same time, the Middle East has been through humungous upheavals, such as the Abraham Accords, Israel’s wars with Gaza, Lebanon, Yemen and Iran, Bab al-Mandeb maritime disruptions, Civil wars in Libya and Sudan, etc. In “usual times”, one or more of such events would have could have caused an “oil-shock” with global economic tumult to follow.

All the above is not to minimise the various disruptions in global crude ecospace and the Middle East geopolitics, but to point to the fact that, unlike 1973, 1979, 1990 and 2001, the world has been largely spared the two long vicious cycles compounding and mutually reinforcing each other. In what follows, we will try to figure out the reasons that the past quicksilver linkage between oil and the Middle East has grown more placid. We would also try to figure out if this growing separation between the two is a new normal or if a reversal is on the cards.  

The Slippery-but-Strategic Liquid:

At the heart of this relative equanimity is a complex interplay of the two fast-evolving situations. On the side of oil, while the Middle East continues to be the largest source of crude, its share has gone down significantly since the turn of the century. The Middle East currently provides 26.2 mbpd of crude, or only a quarter of the total oil produced in the world. Out of it, the region itself consumes over 8.8 mbpd of crude or nearly a third of its total production, leaving only 17.6 mbpd for exports, which is less than a sixth of the total global demand! Thanks to improvements in energy efficiency, greater resort to renewable and alternative energy sources, strong debut by electric, hybrid and ethanol mix run vehicles in much of the world, work-from-home and other energy-saving digital practices, etc., the energy intensity, in general, and that of fossil fuels in particular, has gone down significantly. For instance, the 2025 global annual oil demand would rise only by 1.2%. Further 90% of the annual rise would come from non-OECD countries, where it would go up by 1.9%. In the OECD countries, it was expected to rise by only 0.3%.

However, the global crude supply is being pushed up faster for two reasons. Firstly, there are new producers, such as Shale oilers in the US and deep offshore producers in Brazil and Guyana, who want to recoup their investments. Secondly, several OPEC+ oil producers, which restrained their production during and after Covid-19, are unwinding their curbs.   Interestingly, the OPEC+ unwinds these production cuts, these still count for less than the incremental production by new producers. So, according to OPEC estimates (please see Table 11-1 from OPEC Oil Market Report of August 12 2025 below), the global oil supply will grow by 2.5 mb/d this year and 1.9 mb/d in 2026, of which non-OPEC+ would account for 1.3 mb/d and 1 mb/d, respectively. But as we saw in the previous paragraph, the global oil demand is nearly stagnant: OPEC expected it to rise by less than 1.3 mbpd in 2025, while IEA puts the expected rise to be even lower at 0.68 mbpd[1]. As a result, while OPEC predicts a  supply deficit of 0.1 mbpd (demand 104.3mbpd – production 104.2mbpd), the IEA  has forecast a surplus supply of 1.2 mbpd (production 105.6 vrs consumption 104.4 mbpd) as of July 2025, likely to grow further as OPEC+ production curbs are fully unwound. The situation may also evolve dramatically if the economic sanctions on Russia, Iran and Venezuela are altered. While it is still too early to determine the outcome of these latest policy changes moving in different directions, it is clear that something will have to give for the market to balance this strategic commodity.  

[1] In recent months, the IEA and OPEC have been at odds about their global oil market assessments: The IEA, which represents the oil consumers  has been openly pessimistic about future demand for oil, and consistently predicting that the global demand would peak before 2030. OPEC secretariat, on the other hand, speaks for the producers and exudes confidence about the global oil consumption growing at least till 2040. It has also warned that any premature withdrawal of upstream investments under the belief that oil is passe, would create serious supply bottlenecks. Many of the oil supermajors find themselves at the cleft of a dilemma and have been hedging their upstream oil investment bets with forays into natural gas and renewables.

Geopolitics of the Middle East:

As Table 2 below shows, the global proven reserves of oil are around 1.72 tr barrels. Of these nearly 1.021 tr barrels, 59% of the total are located in the Middle East. Major discoveries in the rest of the world have reduced the share of the Middle East in reserves from its peak of 2/3^rd a few decades ago. Similarly, its share in the current global production and future incremental production have fallen. At the same time, the oil reservoirs in the Middle East are, as a rule, bigger, easier to recover and less expensive to exploit. Therefore, these are considered “oil-long” reserves. Hence, the regional oil producers want to leverage their natural resources for as long as possible. Instead of tactical profits,  they wish to avoid situations, such as high prices, supply uncertainties, etc, which push the consumers to switch from oil to other sources of energy. At the same time, there is a creeping realisation that the oil demand may be peaking soon, attenuating their oil revenues and climate change and the cost effectiveness of the renewables may accelerate this trend. This, taken with their growing intrinsic demand for oil revenues, has pushed the Middle Eastern oil producers to ramp up their production.  For instance, Saudi Arabia’s ambitious  Vision 2030 envisages a total outlay of $1.3 tr over 15 years from 2016. To fund it sustainably, the Kingdom is estimated to need the oil prices to be above $80/barrel at the current output. 

Fig. 2: OPEC Crude Oil Production and Brent Oil Price

There are several factors that have created distance between oil turbulence and tectonic shifts in the Middle Eastern geopolitics. Most of them are long-term developments that appear irreversible in the foreseeable future. The following may bear mentioning:

1. Ongoing bearish trends in the global oil market. 
2. The Western reliance on Middle Eastern oil was low and falling. For instance, the US – the world’s largest oil consumer – no longer imports any oil from this region. The activities of Western oil companies in the region were also low.
3. Major stakeholders are keeping large strategic oil reserves and oil on high seas. 
4. Hedging and Future options are being commonly leveraged by the global traders.
5. Formation of OPEC+, a larger producers cartel with greater manoeuvrability;
6. Israel’s military actions against the bellicose states and non-state operators carefully avoided oil infrastructure; this was particularly so during the 12-day air war with Iran. Thus, it pre-empted Tehran’s retaliation against the oil assets and maritime transportation of the Gulf Arab states.
7. The Middle Eastern states, in general, and oil producers in particular, chose not to exercise their “oil weapon” as the temptation of competitive populism was avoided.   In any case, there was little sympathy on Arab Street for the anti-Israel beligerents following the Oct 7 2023, gruesome attack by Hamas. Similarly, Shia-dominated Iran, Hezbollah and al-Houthis did not invoke any sense of solidarity among Sunni Sunni-dominated Arab Street. Even pro-Iran Shia militias also remained on the margins of the hostilities;
8. Following the four Arab countries’ entering the Abraham Accords with Israel in 2019, the psychological threshold concerning the Palestine issue had come down significantly. The pyro-technical tendency in Arab media to demonise Israel has given way to greater equidistance vis-à-vis the two sides.
9. Similarly, the Arab side had plenty of subterranean scepticism about Iran’s controversial nuclear programme. 
10. Overall, past and ongoing Karmas by the Axis of Resistance did not endear them to Sunni Arab regimes. For Instance, Houthis had waged a 7-year-long conflict with Saudi and Emirati forces during which several dozen missiles hit Saudi and Emirati targets. There was also a lingering suspicion about Hezbollah and Iraqi Shia militias instigating the Shia minorities in the GCC states. So, while the Gulf regimes paid lip service to the heroic resistance against Israel, they did little else apart from humanitarian assistance to the affected Palestinians.

India-Specific Comments:

India is a neighbour of the Middle East with strong and substantive bilateral ties. We are also the world’s second-largest oil importer. Therefore interplay between the global oil ecosystem and the Middle East geopolitics matters to us. Moreover, in post-Covid era, our oil consumption and imports have recorded a CAGR of nearly 3.2% which is over twice the global rate. Consequently, the IEA has predicted that till 2040, India’s consumption growth would be the most consequential driver of the global oil demand. In a closer time frame, it foresees India being on track to post an increase in oil demand of almost 1.2 mb/d during 2023-30, accounting for more than one-third of the projected 3.2 mb/d global gains during that period. (see the Table and three figures, all sourced from IEA’s India OilMarket Report, below).  

From an Indian perspective, the following observations are deemed relevant: 

1. While taking comfort in the receding correlation between the global oil market and the Middle East geopolitics, we need to appreciate that the two may recouple at any time to our detriment. We therefore need to be on our guard and reduce our exposure to the slippery commodity and regional heat.

2. We should be unrelenting in our efforts to reduce our energy intensity in general and hydrocarbon fuel intensity in particular. The ongoing measures need to be augmented. 

3. To the extent possible, we should strive to have our own autonomous and secure hydrocarbon supply chain integrating upstream assets abroad to our distribution points. These should, to the extent possible, avoid choke points such as the Strait of Hormuz and Bab al-Mandeb.

4. We should evolve a comprehensive policy to engage major Oil Producers, particularly in the neighbouring Middle East, by integrating our demand security with their supply security. 

5. There is no denying the defence-for-oil paradigm that has been the cornerstone of the Middle East security for the past century, and we need to appreciate that the Gulf oil producers require reliable defence mentors. As a large, independent and powerful neighbour and the second largest trading partner of the region, we need to fill the defence/security void in the region. By playing such a role, India would contribute to stabilising the region as well as adding viscosity to this notoriously slimy commodity.