What’s The Next Move In The Israel-Iran Standoff And What Will Oil Do?

There is always the possibility that Israel now does "take the win" as U.S. President Joe Biden advised Israeli Prime Minister, Benjamin Netanyahu, albeit before Israel launched missile and drone attacks on nuclear- and military-related facilities in Iran's Isfahan province and in its East Azerbaijan provincial city of Tabriz. There is also the possibility that if Israel does this, then Iran might desist from further direct attacks on Israel from its own territory, after it did so for the first time in multiple attacks on 13 April. As always in the conflict escalation ladder, there are many 'ifs' to be considered. But one small miscalculation on any side - including by the many proxies involved in the ongoing Irael-Hamas War - can tilt the ladder into full-blown war in a single moment and the global oil market into chaos with it. So, what may happen next?

Perhaps the key factor right now in this scenario mix is that Israel acted in direct opposition to the public advice of its key superpower sponsor, the U.S., in attacking Iran directly on its own soil. This does not necessarily mean that Washington did not privately give Tel Aviv the nod to go ahead with the attacks - this is diplomacy, and the White House needs to appear a pacifying influence if it is to retain its appearance of a mediator in the Israel-Hamas War and related conflicts. Nonetheless, the fact that Israel did go against the publicly stated view of the U.S. underlines the strength of feeling among the hardliners in the Israeli five-person cabinet that Iran's direct attacks on Israeli soil must be met with extreme force - and much more than the minimal attacks on Isfahan and Tabriz. These five are Prime Minister Netanyahu, Minister of Defense, Yoav Gallant, former Chief of the General Staff, Benny Gantz, and two nonvoting 'observers' - Ron Dermer, Israel's former ambassador in Washington, and Gadi Eisenkot, another former Israel Defense Forces Chief of Staff. Another key figure is Itamar Ben-Gvir - National Security Minister, who said just after the 13 April Iran attacks that: "To create a deterrent in the Middle East, Israel has got to show that it is prepared to go berserk." Related: White House Aims to Keep Gasoline Prices in Check

But berserk how, precisely? Regardless of whether or not the U.S. did privately give the okay for Israel to launch the 19 April attacks on targets in Iran, Washington definitively will not countenance any Israeli action that directly causes energy prices to rise, according to a very senior source in the European Union's (E.U.) energy security complex. "[President Joe] Biden is headed into an election in November, and he won't want to do that with energy prices spiralling up again, pushing inflation higher, and causing interest rates to spike up," he told OilPrice.com last week. As analysed in full in my new book on the new global oil market order, there are very clear links between oil prices and the re-election chances of U.S. presidents. Economically, longstanding estimates are that every US$10 per barrel change in the price of crude oil results in a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent that the average price per gallon of gasoline rises, more than US$1 billion per year in consumer spending is lost. Crucially in this context, historically around 70 percent of the price of gasoline is derived from the global oil price. Politically, since the end of World War I in 2018, the sitting U.S. president has won re-election 11 times out of 11 if the economy was not in recession within two years of an upcoming election. However, if it was in recession in this timeframe, then only 1 sitting president has won out of 7 times. Even a late lurch towards a worsening economic outlook can significantly affect a sitting president's chances of re-election. "So, any idea the Israelis might have of hitting Iran's oil infrastructure in any major way, including anything in and around the Red Sea or the Strait of Hormuz would be fiercely opposed by Washington," underlined the E.U. security source.

Iran's key superpower sponsor, China, is also likely to be of the same view. This applies equally to Tehran deciding at any point to attempt to either try to invoke an OPEC oil embargo on countries supporting Israel, or to  close the key global oil transit route of the Strait of Hormuz in retaliation for anything Israel might do. Unlike the situation of the last major OPEC oil embargo in 1973/74 that caused the Oil Crisis, as also analysed in full in my new book on the new global oil market order, China is now a huge global consumer of oil, as are the countries with which it does most of its business. 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 the E.U. source, the economic damage to China - directly through its own energy imports and indirectly through damage to the economies of its key export markets in the West - would dangerously increase if the Brent oil price remained over US$90-95 pb for more than one quarter of a year.

This said, there is one particular option available to Israel that would allow it to 'go berserk' that would not be opposed by the U.S., although again publicly the White House might voice opposition. As already tested on a very limited basis in Isfahan and Tabriz, a bigger and broader attack on Iran's nuclear facilities aimed at delaying the path to warhead-deliverable nuclear missiles would likely find favour with Washington. "There are 23 sites in Iran that are integral to its ongoing nuclear programme, and Israel knows where all of them are, and has the means to take them out," said the E.U. source. "A good place to start would be the big new facility they [the Iranians] are building in Natanz to the south of Qom, and they may already have signalled this intention with the attacks near the UCF [Uranium Conversion Facility] research centre in Isfahan city," he added. "The reason why they [the Israelis] didn't do it before, despite wanting to, was that the Americans said they could deal with Iran through the JCPOA [Joint Comprehensive Plan of Action - or 'nuclear deal'], but that's still off the table, so I don't think they [the U.S.] would have too much of a problem with it now, and they can say they had nothing to do with it anyway," he told OilPrice.com last week. "The danger of blowback from any of the other major Arab states in the region for this would also be minimal at most, as Iran's rising nuclear threat is a big concern for them too," he concluded.

If Israel did take this most likely route of further retaliation against Iran, then Tehran might well decide to retaliate itself with attacks that did have direct consequences for the oil price, from which it would additionally benefit as a big oil and gas producer. According to the E.U. source, the most likely form of this would be to use the Houthis to either attack Saudi Arabia's oil facilities and/or to step up their actions against shipping in and around the Red Sea area. As analysed by OilPrice.com, the Houthis very recently vowed to attack Saudi Arabia if it continued to allow U.S. warplanes to use its territory for military strikes against the Yemeni rebel group. The last time the Houthis launched major coordinated attacks against the Saudi Arabian mainland - on 14 September 2019 against the Abqaiq oil processing facility and Khurais oil field - Saudi Arabia's oil production was halved, causing the biggest intra-day jump in U.S. dollar terms since 1988, as also analysed in full in my new book on the new global oil market order.

By Simon Watkins for Oilprice.com

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