Oil’s next act: why $170 is no longer unthinkable

Paula Krugman

For much of the past century and a half, oil markets have followed a familiar script. A geopolitical shock erupts, prices rise—often sharply—but the initial reaction tends to understate the depth and duration of the disruption. Only later, as physical constraints bite and expectations adjust, does the market fully reprice risk.

There are growing signs that we are once again in that early phase.

A glance at the history of oil shocks—from the 1973 embargo to the Iranian revolution, from the Gulf war to the 2008 spike—reveals a consistent pattern: the first move is rarely the decisive one. Prices climb, but not yet to levels that reflect the full extent of supply dislocation. Today’s market, despite its recent surge, still appears modest relative to some of those earlier episodes. That alone should give pause to those betting on a swift reversal.

What distinguishes the current moment is not merely the presence of disruption, but its simultaneity. Two of the world’s most critical oil arteries are under strain at the same time. The Strait of Hormuz, through which roughly a fifth of global supply flows, faces severe constraints. At the same time, Russian export capacity via the Baltic is under mounting pressure, with infrastructure disruptions threatening a substantial share of outbound flows.

Individually, either event would be sufficient to unsettle markets. Together, they present a more profound challenge. The global oil system is not infinitely flexible; it depends on a delicate choreography of routes, storage and spare capacity. When multiple nodes falter at once, substitution becomes difficult, if not impossible, in the short term.

This is why the language of “price volatility” may be increasingly misleading. The issue is no longer simply one of sentiment or speculative positioning. There are mounting indications of tightening physical availability: cargoes being rerouted or delayed, warnings over delivery obligations, and a thinning buffer of seaborne supply. These are the hallmarks of a market edging from imbalance into outright scarcity.

Scenario analyses offered by major institutions provide a useful, if conservative, framework. Short-lived disruptions might push prices towards $120 a barrel; more prolonged tensions could sustain levels around $140; deeper damage to production capacity might anchor prices closer to $160. Yet such projections often assume a degree of containment that currently looks optimistic. They are built on linear extensions of stress—not on compounded shocks.

If the present disruptions persist, or intensify, the leap beyond those thresholds becomes easier to envisage. In that light, a move towards $170 would not represent an aberration, but rather the logical outcome of tightening constraints across multiple fronts.

Financial markets are beginning to register this shift. Episodes of abrupt liquidation in risk assets hint at a broader repositioning. In periods of heightened geopolitical uncertainty, capital tends to migrate towards tangible assets with intrinsic value. Oil, as both a strategic commodity and an inflation hedge, stands to benefit from such flows. That dynamic can amplify price movements already driven by fundamentals.

On the demand side, there is little immediate relief. Asia’s largest economies—China, India, Japan and South Korea—remain structurally dependent on imported crude, much of it historically routed through vulnerable corridors. Demand elasticity in the short term is limited; consumption patterns do not adjust quickly enough to offset supply shocks of this magnitude. Instead, competition for available barrels intensifies, reinforcing upward pressure on prices.

None of this guarantees a straight line to $170. Oil markets are notoriously sensitive to political decisions, diplomatic breakthroughs and shifts in producer behaviour. A rapid de-escalation could yet alter the trajectory. But absent such a shift, the balance of risks appears skewed to the upside.

Perhaps the more important point is conceptual. What is unfolding may not be another cyclical spike, destined to fade once tensions ease. It bears the characteristics of a structural reset—one in which supply vulnerabilities, geopolitical fragmentation and constrained spare capacity converge.

If that reading is correct, then the question is not whether prices have risen too far, too fast. It is whether they have risen far enough.