The Golden Rule of the oil market: Understanding global price dynamics and emerging exceptions

Mark Finley
Baker Institute, Rice University 

In recent weeks, questions surrounding the oil market crisis have been framed around a core principle described as the Golden Rule of the Oil Market: it is a global market. When conditions change anywhere—positively or negatively—prices respond everywhere.

That framework helps explain why gasoline prices are rising in the US despite limited direct imports from the Middle East and the US’s status as a significant net exporter of oil. It also explains why oil cargoes that Iran permits to transit the Strait of Hormuz reduce Iran’s leverage over global oil prices, and by extension over US consumers and policymakers concerned about prices at the pump.

Alongside its own exports, Iran has allowed a handful of additional tankers to transit the Strait, including several tankers destined for China and LPG shipments for India. The greater the volume of oil transiting the Strait, the smaller the disruption to the global oil market and the less upward pressure on global prices.

The same logic applies to US efforts to ease sanctions on Iranian and Russian oil cargoes already at sea, which are unlikely to provide meaningful relief for rising oil prices. Under the Golden Rule, those barrels—having already been produced and shipped—would have found buyers regardless of sanctions, with price discounts sufficient to offset the risk of US penalties, as has been the case for Russian oil since 2022.

Exceptions

The Golden Rule has described oil market dynamics effectively for decades. However, a small number of potential exceptions have begun to emerge. For now, those exceptions remain relatively inconsequential, though larger risks may be developing.

The non-market player

There are two ways that supply and demand can be equalized. In a global market, it is achieved by price changes. Prices rise or fall to ensure that there is a balance at the end of the day (including changes to inventories). There is another way to force demand to equal supply: rationing. Envision the shortages and long lines at the pump that accompanied US price controls during the 1970s oil shocks.

Many lower-income countries have been unable to compete for global supplies in recent weeks amid surging prices, and have resorted to emergency measures to ration scare fuel.  Among other moves, schools have closed in Pakistan and Bangladesh, a 4-day work week has been implemented in the Philippines, and restaurants have closed in India—in the latter’s case, due to a lack of LPG for restaurant cooking fuel.

This leads to the first potential exception to the Golden Rule: Cargoes destined for countries that otherwise would not have participated in the global marketplace don’t count.

If Iran allows a handful of non-Iranian LPG cargoes to India that wouldn’t have otherwise been permitted to transit the Strait, and India would not have purchased those cargoes elsewhere because the price was too high, then these cargoes don’t add to the global marketplace.

This is a very narrow exception: Iran can only maintain leverage over the global oil price if the cargoes it allows through the Strait for lower-income countries don’t displace cargoes that those countries would have bought anyway. Otherwise, we go back to the Golden Rule.

The Great (Barrel) Wall? 

China is not a low-income country, and it is the world’s largest oil importer. But a case could be made that it has become a one-way participant in the marketplace, and therefore an exception to the Golden Rule: Oil goes in, but doesn’t come out, regardless of the price.

That was not the case before the crisis. Previously, China exported over a million b/d of refined products. In the early days of the crisis, however, the government in Beijing directed domestic refiners to cease exporting refined products. In this sense, US Treasury Secretary Bessent had a point in arguing that US easing of sanctions against Iranian cargoes already at sea would make those barrels available to the global marketplace rather than having them go behind the Chinese Great (Barrel) Wall.

One could argue that the Great (Barrel) Wall is a relatively narrow exception to the Golden Rule. While China has been reportedly building massive oil inventories over the past year, even continuing to store one million b/d (as has been reported) pales in comparison to the ongoing disruption in Hormuz oil flows. Eventually, storage capacity limitations and the ability of Chinese refiners to meet domestic demand without generating surplus products will limit how much oil can disappear behind the Great (Barrel) Wall.

Risk going forward

For now, these exceptions have not disrupted the functioning of the global marketplace. But larger risks loom. 

In the US and elsewhere, the prospect of broader restrictions on oil trade have been raised as the crisis builds. For now, such proposals have been disavowed by the Trump administration, but the topic has come up in previous oil crises, going back to the 1970s and as recently as the aftermath of Russia’s invasion of Ukraine.

Moreover, other countries—especially in Asia, where most Hormuz oil flows are destined—have, or are considering, similar moves.

Interfering with international oil trade risks more severe disruptions of both the domestic and global marketplace, as well as the reliability of price signals themselves.  With more than 100 million bbl of oil produced, traded, and consumed daily, the oil market has been a model of efficiency that has served US (and global) economic and strategic interests. The US benefits significantly from its participation in that global marketplace, exporting nearly 11 million b/d of crude oil and refined products while also importing nearly 8 million b/d. 

Even in a crisis, experience shows that it is best to rely on the Golden Rule, even with its exceptions.

Author 

Mark Finley is a nonresident fellow in energy and global oil at Rice University’s Baker Institute. He has over 35 years of experience working at the intersections of energy, economics and public policy. Before joining the Baker Institute, Finley was the senior US economist at BP. For 12 years, he led the production of the BP Statistical Review of World Energy.