Escalation In Israel-Hamas Conflict May Doom Oil Markets

In the last 50 years or so, it is difficult to think of a time when so many dangers from so many directions could each spiral out of control so quickly as is now occurring in the Middle East, centred on the Israel-Hamas War. For the global energy market, the closest approximation to the situation is the 1973 Oil Crisis, as analysed in full in my new book on the new global oil market order. From this, inferences can be drawn as to what may happen to oil and gas prices in the short-, medium-, and long-term. 

Although the current war between Israel and the Palestinian political and militant group Hamas originated in the murder of over 1,400 of the former's civilians by the latter on and around 7 October, it has quickly begun to revert into the long-running conflict over the statehood of Israel and Palestine. This brings with it the potential to draw into the war several other Arab states in the region who support Palestine's right for a fully independent state. It also means that Iran - a Persian, not an Arabic, state, but one which does is committed to erasing the state of Israel - has everything to gain by instigating a widening out of the present war between Israel and Hamas.

Back in 1973, exactly such a wider conflict between Israel and several Arab states had begun almost precisely when the recent Hamas murders of Israeli civilians began - on the holiest day of the Jewish faith, Yom Kippur. Egyptian military forces moved into the Sinai Peninsula, while Syrian forces moved into the Golan Heights, both of which territories had been captured by Israel during the Six-Day War of 1967. Although Egypt and Syria remained the principal two Arab combatants, military support for them came from Saudi Arabia, Morocco, and Cuba, and broader support from Algeria, Jordan, Iraq, Libya, Kuwait, Tunisia, and North Korea. The war ended on 25 October 1973 in a ceasefire brokered by the United Nations.

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However, around the same time as this, OPEC members - plus Egypt, Syria, and Tunisia - began an embargo on oil exports to the U.S., the U.K., Japan, Canada and the Netherlands in response to the U.S.'s supplying of arms to Israel during the War. As global supplies of oil fell, the price of oil increased dramatically, exacerbated by incremental cuts to oil production by OPEC members over the period. Gas prices also rose, as historically around 70 percent of them are comprised of the price of oil. By the end of the embargo in March 1974, the price of oil had risen around 267 percent, from about US$3 per barrel (pb) to nearly US$11 pb. This, in turn, stoked the fire of a global economic slowdown, especially felt in the net oil importing countries of the West.

Some later branded the embargo a failure, as it did not result in Israel giving back all the territory that it had gained in the Yom Kippur War. However, in a broader sense, as also analysed in full in my new book on the new global oil market order, the wider war had been won by Saudi Arabia, OPEC and other Arab states in shifting the balance of power in the global oil market from the big consumers of oil (mainly in the West at that time) to the big producers of oil (mainly in the Middle East at that point). This shift was accurately summed up by the slick, clever and urbane then-Saudi Minister of Oil and Mineral Reserves, Sheikh Ahmed Zaki Yamani, who was widely credited with formulating the embargo strategy. He highlighted that the extremely negative effects on the global economy of the oil embargo marked a fundamental shift in the world balance of power between the developing nations that produced oil and the developed industrial nations that consumed it. However, from this point the U.S., under the guidance of Henry Kissinger - who served as National Security Advisor from January 1969 to November 1975 and as Secretary of State from September 1973 to January 1977 - began to roll out its new Middle East policy aimed at ensuring that it and its allies were never again held hostage by Middle Eastern oil producers. The policy, as fully detailed in the book, was a variant of the triangular diplomacy that Kissinger had been using to great effect in the U.S.'s dealings with Russia and China, with the use of 'constructive ambiguity' in the language used in dealing with the countries involved. In practical terms, this meant the U.S. appearing to be on the side of various elements of the Arab world but, in reality, seeking to exploit their existing weaknesses to set one against another. 

The enormously complicating factor now that did not exist back in 1973 is the Islamic Republic of Iran, which came into existence in 1979. With the removal of Israel as a state being one of its core objectives, alongside the destruction of all U.S. influence in the Middle East, several highly-placed security sources in both the U.S. and the European Union (E.U.), exclusively spoke to by OilPrice.com last week, do not believe that Hamas would have acted against Israel on 7 October without - at minimum - assurances from Iran that its actions were not opposed in Tehran. "Israel is regarded as an abhorrence by Iran - not just because of its existence as a state, but also because it is seen as the primary tool by which the U.S. seeks to extend its influence across the Islamic world of the Middle East, so [Iran] it has everything to gain by manipulating this war [between Israel and Hamas] into something much bigger," a senior source in the E.U.'s security complex told OilPrice.com. "The timing of this - 50 years after the 1973 Yom Kippur War - was not just symbolic of that, but also a signal for the next 50 years, in which Iran wants to see a Middle East without Israel or the U.S., with itself at the centre, and it was important that it was done before Saudi Arabia signed a relationship normalisation deal with Israel," he added. As it stands, any idea of an early signing of a relationship normalisation deal between Israel and Saudi Arabia now looks on indefinite hold at best, and the existing deals between Israel and the UAE, Bahrain, Morocco and Sudan look increasingly under threat. 

Although there is a flurry of diplomatic activity taking place to avert the Israel-Hamas War widening out, on 16 October Iran's Foreign Minister, Hossein Amir Abdollahian, warned that its regional network of militias would open "multiple fronts" against Israel if its attacks continued to kill civilians in Gaza. It seems highly likely that the first new front would be a full activation of Hezbollah in Lebanon, to Israel's direct north; a 100,000-strong very well-equipped fighting force funded and trained by Iran's Islamic Revolutionary Guards Corps (IRGC) that dwarfs the fighting capabilities of Hamas in all respects. Israel has already stated that its mission is to "annihilate Hamas" and that to do so it will launch ground operations into Palestine for as long as it takes to do so. Additionally, over the weekend, Israel's Minister of Economy, Nir Barkat, said that if Hezbollah fully joins the war then Israel would "cut off the head of the snake" and launch a military attack against Iran. A third front could also be opened by Iran, using its own IRGC and proxy militant forces stationed in Syria, to Israel's northeast.

The potential for oil and gas prices to spike is considerable if the conflict does indeed widen out. Reductions in supply from any of the major OPEC suppliers - let alone all of them at once, as might be the case - would be extremely difficult to compensate for, although there are plans in place by the West to attempt to do so. Emergency gas supplies from Qatar appear likely to continue under most circumstances, which would alleviate some short-term price pain in the West, as they did after Russia invaded Ukraine in 2022. Plans are also in place to extend the easing of sanctions on Venezuela seen on 18 October, according to the E.U. source, with the country's crude production averaging around 770,000 bpd in September. Additionally, the International Energy Agency (IEA) said on 12 October that it is "ready to act" if the Israel-Hamas War escalated to hit oil supplies in the region. As has been seen before in times of dramatic oil price rises, the agency can coordinate the release of emergency oil stocks with each IEA member country. Each is obliged to hold oil stocks equivalent to at least 90 days of net oil imports and to be ready to respond to severe supply disruptions affecting the global oil market. This said, OPEC+ controls around 40 percent of global crude oil supplies.

By Simon Watkins for Oilprice.com