The Oil Weapon That No Longer Strikes Fear

Why Iran’s showdown with the West failed to shake global markets and what it says about the new geopolitics of energy

By Luiz Medrado

When U.S. bombs hit Iranian territory in a coordinated strike with Israel, analysts braced for a familiar domino effect: panic in the oil markets, prices spiking to triple digits, and headlines screaming of another global energy shock. But instead, the markets yawned. Prices barely budged. Within days, crude was back trading around $65 a barrel.

This wasn’t how the oil story was supposed to go.

For decades, Middle East instability meant market chaos. From the 1973 oil embargo to the Iraq wars, any geopolitical friction involving oil producers, especially Iran, came with an automatic fear premium. But this time, despite the real risk of escalation, markets remained calm.

Why?

To understand this new dynamic, it is necessary to analyse what has changed in the market dynamics for Oil futures.

A New Oil Map

The biggest shift is geographical. Beginning in the 2010s, the relationship between Middle East instability and oil prices began to unravel.

The reason: the shale revolution. In just over a decade, the United States transformed itself from a major importer to one of the world’s top exporters of crude oil. Canada followed suit, as did Brazil and Guyana with major offshore discoveries. Together, these countries turned the Western Hemisphere into a reliable and relatively stable source of global oil supply.

As of 2024, the region accounted for nearly 17% of global oil exports.

For markets, that means there’s now a significant cushion. If a crisis hits the Middle East, it no longer feels like the whole system is at risk of collapse.

Two Oil Markets, One Message

There’s another major reason the Iran strikes didn’t rock the boat: the rise of a gray-market oil economy.

Countries under heavy Western sanctions those being Iran, Russia, and Venezuela, haven’t stopped exporting oil. They’ve simply rerouted it. Much of it now goes to China, India, and other countries that haven’t joined the U.S.-led sanctions regimes.

In effect, we now have two oil markets. One is the official, regulated market, which most of the world sees. The other is a shadow economy where sanctioned oil flows at a discount to countries willing to bypass the rules.

Iran, Russia, and Venezuela together control around a third of the world’s proven oil reserves. If these countries had truly been removed from global markets, we’d see a big enduring impact on oil prices. But they haven’t. They’ve just shifted customers.

That hidden cushion keeps the main market more stable than it appears. Even if formal Western markets were disrupted, alternative flows, particularly to China, keep global supply from collapsing.

Why Iran Won’t Pull the Trigger

So why doesn’t Iran shut the Strait of Hormuz, the narrow passage through which about 40% of the world’s seaborne oil once traveled?

Because it can’t afford to.

Yes, closing the Strait would spike prices. But it would also sever Iran’s own lifeline to China, its largest oil customer. Unlike in the 1970s, there’s no viable overland export alternative for Iran. Blocking maritime traffic would mean cutting off its own economic oxygen.

This isn’t just a hypothetical. Iran learned a hard lesson over the past decades: using oil as a geopolitical weapon might cause short-term pain to adversaries, but it causes long-term damage to itself.

It’s a kamikaze strategy. And unless the regime feels existentially threatened, like facing total collapse, it has no incentive to go that far.

That logic seems to be understood in Washington and Tel Aviv. The strikes were calibrated to degrade Iranian influence but not push the regime into desperation. And markets, reading that calculation, adjusted accordingly.

Winners and Losers in a New Oil Economy

There’s one more layer to this story: a shift in who wins and loses from oil price shocks.

In the 1970s, rising oil prices were a straightforward disaster for the United States. Today, not so much. The U.S. is now a major oil exporter. Higher prices benefit parts of the economy, particularly shale regions like West Texas and the Dakotas, even as they hurt consumers.

China, by contrast, is now the world’s largest oil importer. It’s far more vulnerable to price hikes than the U.S. And ironically, it’s China, not America, that’s most exposed if Iranian oil is taken offline.

This means that even if Iran wanted to retaliate economically, it would mostly be hurting its own allies and partners.

The End of an Era?

None of this is to say oil has become irrelevant. It remains a pillar of the global economy and a major factor in geopolitical strategy. But what’s changing is the psychology around it. Markets no longer panic the way they used to. Governments no longer see oil disruption as a guaranteed disaster. And oil producers, even those with powerful tools like the Strait of Hormuz, know better than to overplay their hand.

The oil weapon still exists, but in today’s world, it’s far duller than before.