A Houthi Retaliation Could Send Oil Prices Soaring

• Following the attacks from a Western coalition on Houthi targets, Iran, Russia, China and the Houthis themselves are preparing a response.
• It is crucial to note that Iran’s initial plan to create further chaos for the U.S. and its allies was to cause oil prices to spike.
• The financial and political bar for China to give its blessing to a major escalation of the War into a wider Middle East conflict has been lifted a lot higher recently.

The World Bank said at the end of October that a ‘large disruption’ in the global supply of crude oil – which it equated to between 6 and 8 million barrels per day (bpd) – would result in a 56-75 percent increase in prices to between $140 and $157 a barrel. However, as analysed by OilPrice.com at the time, a significant escalation in the Israel-Hamas War could lead to a much greater loss of crude oil supplies than that, and consequently much higher oil prices than even the top of that World Bank range. Following the U.S. and U.K. air and sea strikes in the last few days on Iran-backed Houthi rebels in Yemen in response to a series of attacks on international shipping in the Red Sea, such a significant escalation may well occur in the next few days. It is certainly what Iran wants. It may also be what Russia wants. But whether it is what China wants is open to question, and the answer to that will determine where the War, oil prices, and security across the Middle East go from here. 

Iran wants to widen the Israel-Hamas War because it will advance its core objective in place since the 1979 Islamic Revolution, as analysed in full in my new book on the new global oil market order. Quite simply, this is to be the spearhead of a wider Islamic Revolution across the globe that ultimately supplants the democratic Judeo-Christian order that prevails in the U.S. and its key allies. Everything Iran has done since 1979 has been geared to that single objective, with the guardians of the Revolution – the Islamic Revolutionary Guards Corps – tasked with achieving it through three key strategies. All three are equally important as they all complement each other when in full operational mode. The first is to be the architect of the withdrawal of the U.S. and its allies from the entire Middle East. The second is to destroy the state of Israel. And the third is to spread its own version of Shia Islam across the Middle East and then into the rest of the world. To accomplish all three, Iran needs weapons, training, and money. This means that, although not a key strategy in itself, maintaining good relations with Russia and China is an important means to these ends. A perfect example of this realpolitik in action has been providing China with as much cheap oil and gas as it needs (including from Iraq, over which Iran has enormous control), in exchange for tacit military and political support, as also analysed in full in my new book. Another has been providing Russia with high-volume, low-price missiles and drones to use in its war against Ukraine, in exchange for the continued push to secure Iran a land bridge to the Mediterranean coast of Syria. Both of these ‘allies’ also have a Permanent Member seat (out of only five in total) on the United Nations Security Council, which protects Iran from UN-mandated military actions against it by the West. Their money, weapons, training, and access to financial networks allows Iran to fund its global network of political, economic, and military proxies, including Hezbollah in Lebanon, Hamas in Palestine, and the Houthis in Yemen. Related: Geopolitical Risks Push Oil Prices Higher

After Hamas’s murder of hundreds of Israeli citizens on Israeli soil on 7 October, it is crucial to note that Iran’s initial plan to create further chaos for the U.S. and its allies was to cause oil prices to spike. This it attempted to do by calling for an embargo by Islamic states on oil exports to Israel in the first instance. Given that Israel buys virtually none of its oil from Islamic states - purchasing mainly from Azerbaijan, the U.S., Brazil, Nigeria, and Angola instead – this call was just a precursor to Iran’s plan to inveigle OPEC to embargo oil exports to Israel and all its supporters. Iran intended this to be a re-run of the 1973/74 Oil Crisis, which had seen the price of oil increase around 267 percent, and had stoked the fire of an economic slowdown in the West, as also analysed in full in my new book on the new global oil market order. The embargo had been placed on supporters of Israel (the U.S., the U.K., Japan, Canada, and the Netherlands) in the 1973 Yom Kippur War that had also started when hostile Middle East forces (beginning with Egypt and Syria) had invaded Israel on the holiest day in Judaism, just as Hamas did on 7 October last year.

Russia would have been delighted to see such an embargo in place for two key reasons. First, increasing tension in the Middle East in a way that directly impacts the U.S. and its allies would divert their attention away from Russia’s own war in Ukraine. The less focus there is on that, the greater the chance of support ebbing away for Ukraine, and the greater the chance of a Russian victory of one sort or another. Second, dramatically rising oil prices would allow Russia to sell its own oil at much higher prices as well, despite various caps and discounts put into place following its invasion of Ukraine. As also analysed in my new book on the new global oil market order, Russia earned nearly US$100 billion from oil and gas exports during the first 100 days of the war in Ukraine. Overall, revenues from the higher post-invasion oil and gas prices were much greater than the cost for Russia of continuing to fight the war. However, as prices started to weaken again, Russia’s finances and its ability to secure an outright military victory have been significantly reduced. So desperate has the situation become for President Vladimir Putin that he risked arrest in December to visit Saudi Arabia’s Mohammed bin Salman, and the UAE’s Mohamed bin Zayed al Nahyan, to plead for greater cuts in OPEC oil production in order to push prices up. Ultimately, he did not obtain the result he wanted.

A principal reason why he did not get what he wanted was China, and it is China that holds the key to where the Iran-Houthi retaliation for the recent U.S.-U.K. attacks, and the Israel-Hamas War, goes now. Quite simply, the financial and political bar for China to give its blessing to a major escalation of the War into a wider Middle East conflict has been lifted a lot higher recently. Following three financially disastrous years of Covid, China’s economic recovery remains fragile, and this will not be helped by long spikes in the oil price. It is true that China can still buy oil and gas at 30 percent or more discounts from its key Middle Eastern suppliers through various deals agreed in the past few years. However, it is also the case that the economies of the West remain its key export bloc, with the U.S. still accounting for over 16 percent of China’s export revenues on its own. According to a senior source in the European Union’s (E.U.) energy security complex spoken to exclusively by OilPrice.com recently, economic damage to China would dangerously increase if the Brent oil price remained over US$90-95 pb for more than one quarter of a year. Indeed, Beijing’s lack of appetite for an outright superpower showdown in the Middle East right now was signalled clearly by the recent visit to the U.S. of its President, Xi Jinping – his first in six years.

The danger here is if China changes its broadly cooperative posture towards Western interests in light of the escalation by the U.S. and U.K. last week. Through various hard-won agreements with several Middle Eastern states over the past few years, China has gained effective control over the region’s key shipping routes, as also analysed in my new book on the new global oil market order, so being seen to relinquish any significant element of this influence might be too much for Beijing to accept. The U.S. and U.K. attacks on Yemen may be seen by China as an unacceptable expansion of the U.S.-led ‘Operation Prosperity Guardian’ – the new multinational security initiative announced recently by the World Shipping Council. This came shortly after the U.S. Department of Defense stated that the initiative was being launched under the umbrella of the Combined Maritime Forces and the leadership of its Task Force 153. The Force so far comprises only countries allied to the U.S., including the United Kingdom, Bahrain, Canada, France, Italy, Netherlands, Norway, Seychelles, and Spain. If China did take its foot off the brake with Iran, then the chances of an embargo on oil exports first to Israel and then to its allies would dramatically increase, bringing with it the prospect of a re-run of the events of the 1973 Oil Crisis, as examined in detail in my new book. 

By Simon Watkins for Oilprice.com

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