Middle East Conflict Drags on While Energy Risks Escalate

KEY POINTS

• Expanding Middle East conflict, depleted US oil reserves, and rising crude prices threaten higher energy risks for construction firms.

• Key buffers against energy price shocks—including oil in transit and the US Strategic Petroleum Reserve—have largely been exhausted.

• Rising oil and diesel prices are increasing construction costs, prompting firms to bid projects cautiously with the expectation that energy prices will remain elevated.

Conflict Expands Across Critical Waterways 

The war in the Middle East which began in late February initially between the US, Israel and Iran has now entered its seventh month. Since its start, the conflict has expanded beyond the critical Strait of Hormuz, and now includes the Bab el-Mandeb Strait, a Red Sea chokepoint into the Gulf of Aden along the borders of Saudi Arabia and Yemen. 

This expansion means that two essential waterways for worldwide energy transportation are now involved in an enlarged war zone with no clear end in sight.

The conflict’s status could not be more ominous for US energy prices, especially as one-time maneuvers to dampen energy price shocks have now been largely played out. 

Delay Lever #1: Oil in Transit

In the early days of Operation Epic Fury, a record number of oil-laden tankers were already at sea, meaning that it would be many weeks before oil in transit would be offloaded and consumed, delaying any immediately physical shocks to oil supplies.

Six months later, however, the picture is very different. 

The oil that was in transit has long since been processed and consumed. 

Delay Lever #2: Strategic Petroleum Reserve

More worrying is that the US has largely exhausted its usable strategic petroleum reserves which buffered Middle East energy supply shocks. Lacking further reserves, oil prices are beginning to reflect the new, harsher reality facing the US and global energy markets with higher prices. 

As of early September, America’s strategic petroleum reserve (SPR) held 285 million barrels of oil, the lowest level since it was first filled in the early 1980’s. For reference, the SPR held well over 600 million barrels of crude oil between 2003 and 2021. 

To prevent damage to the salt caves where it is stored, it has been claimed that the caverns must always keep between 250 and 300 million barrels of oil.

Additionally, as the volume of oil falls, it becomes rapidly more difficult to pump the remaining oil out of the caves at volumes sufficient to satisfy energy market demands. 

As of early September, America’s strategic petroleum reserve (SPR) held 285 million barrels of oil, the lowest level since it was first filled in the early 1980’s. Shown in an image above. For reference, the SPR held well over 600 million barrels of crude oil between 2003 and 2021. Image: ConstructConnect

Oil Prices Reflect a Harsher Market Reality 

As of mid-September, the price of West Texas Intermediate (WTI) oil was nearing $95 per barrel while Brent crude, considered to be the international benchmark, was moving past $106 per barrel. The last time prices sustained such levels was in May, as energy prices were coming down from their peaks reached soon after the start of Operation Epic Fury.

The exhaustion of backup energy sources, coupled with no clear end to current military conflicts abroad, has created a concerning situation for energy markets as seen in US national diesel prices soaring past prior all-time highs.

For construction firms this means greater expenses in nearly every aspect of their work including transportation, machinery operations, and buying energy-intensive goods — with no end point in sight. 

Moving ahead, firms should cautiously bid work with the expectation that energy prices remain at or above current levels. 

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