Toward the end of October, Brent crude prices crossed $60 per barrel for the first time in two years. They continued their ascent, peaking at around $64. Experts explained the spike with vague references to “geopolitical risk,” without really detailing what those risks entailed. Such explanations are not wrong, but they are careless. A proper geopolitical risk assessment necessitates that we go beyond equivocal wording and develop an understanding of the relevant economic, political, and military factors.

Threats to Supply

For weeks, developments in Saudi Arabia have been cited in commentary on oil markets. It all comes down to the rivalry between Saudi Arabia and Iran—a rivalry that plays out throughout the region, in Yemen, Lebanon, Iraq, Syria, and elsewhere.

In early November, the Houthis, a group of Iranian-backed Shiite militants who have been fighting Saudi Arabia in Yemen, launched a missile at Riyadh. The Saudis accused the Iranians of supplying the missile. Then Riyadh claimed that Lebanon had declared war on Saudi Arabia and forced the Lebanese prime minister, who was in Riyadh at the time, to resign. Lebanese politics are heavily influenced by Hezbollah, a paramilitary group with strong ties to Iran. (Around the same time, the Saudi king and crown prince began arresting potential rivals to the throne.)

Saudi Arabia is trying to keep Iran preoccupied so that it cannot gain too much ground in Syria, where the Islamic State has now lost nearly all of its territory. The Saudis don’t want the Iranians to develop a land bridge to the Mediterranean through Iraq, Syria, and Lebanon. This would not only threaten Saudi Arabia’s security from the north, but it would also give Iran access to the Mediterranean and, therefore, the ability to export more to Europe.

What does this have to do with the price of oil? For one thing, in the course of their quarrel, Iran and Saudi Arabia could destroy infrastructure, affecting the ability of oil producers to get oil to the market. How likely is this? With a great deal of effort, Iran’s proxies could damage a small portion of Saudi Arabia’s infrastructure, but they couldn’t take on Saudi Arabia in an all-out fight. On the flip side, while some Sunni extremists have carried out terrorist attacks in Iran, their ability to damage Iran’s oil infrastructure is limited.