The 1973 oil crisis, much like the 2008 financial crash, was more than just a generational shock. Instead, it was one of those collective traumas of which even those who did not experience it know the consequences all too well. The two simultaneous wars — Russia and Ukraine; Israel and Hamas — have now reawakened the ghosts that were believed to be buried. The ever-cautious International Energy Agency (IEA), perhaps somewhat hastily, has recently distanced itself from the oil embargo that forever shifted the energy landscape and left the scars for all to see.
Five decades later, geopolitics in the Middle East — and whatever path Iran takes in the conflict — will once again dictate the oil and gas landscape. Israel’s fossil production is minimal, but the open spigot in the region has put both locals and outsiders on guard. Nearly one out of every three barrels consumed globally every day originates from this region, which has become a real powder keg. The following is a review of the potential scenarios that are now unfolding:
The confrontation is dragging on, as Israel continues to attack Gaza, and fighting continues in Lebanon and Syria. However, the rest of the Arab forces have refrained from engaging in hand-to-hand combat, and this will allow for an eventual and gradual de-escalation. “As the Israeli invasion of Gaza, which was expected to be imminent, has not yet taken place and some Hamas hostages have been released, the pressure on the market has eased,” says Jorge León, senior vice president of the energy consulting firm Rystad Energy and a former senior official of the Organization of the Petroleum Exporting Countries (OPEC).
In this, the mildest scenario, crude oil would remain where it is today — and where it was before the Hamas attack — at around $90 per barrel, and gas would stabilize at around €50 per megawatt-hour, according to calculations by the Norwegian analysis center. The central banks would not be forced to increase interest rates again and the world economy would breathe a sigh of relief.
However, even in this alternative situation, nerves remain high. “Unrest in the Arab world would persist, and developments in the Middle East always reverberate in the energy markets,” recalls Gonzalo Escribano, senior researcher and director of the Energy and Climate Change program at the Elcano Royal Institute. “At this point, the damage accounting is already very substantial, the discomfort of the Arab public is clear, and this already carries a risk premium: the hope of a normalization of prices after the Russian invasion of Ukraine has vanished.” Energy disinflation, at least in the medium term, is getting more complicated.
This last point is particularly significant. Until three weeks ago there was considerable expectation of an agreement between Saudi Arabia — the largest crude oil exporter on the planet — and Israel, which seemed to suggest an end to the production cuts implemented by the Gulf giant, the main driving force behind the escalation of the last few months. But in a blink of an eye, hope has all but vanished: “Now, the cost of such a move would be prohibitive: Arab unrest in the streets has also reached Riyadh, and two weeks ago [Crown Prince Mohammed] Bin Salman kept [Anthony] Blinken waiting for seven hours before their meeting. The negotiating atmosphere is bleak,” concludes the analyst at Elcano.
Iran does not get involved, but new sanctions follow
Iran is the linchpin in the complex regional puzzle that has formed since the war broke out on October 7, and a new round of Western sanctions on its oil production would significantly complicate matters. “The risks remain low… Unless the conflict escalates, or the U.S. or Israel target Iranian exports directly,” summarized Raad Alkadiri, Gregory Brew and Risa Grais-Targow of risk consultancy Eurasia in a recent briefing note.
“The West has been turning a blind eye to Iranian crude oil for some time now, to prevent prices from soaring,” says Rystad’s León. And now, the U.S. administration is in a rather complex position: if the escalation continues, it will be faced with a dilemma. It will either have to intensify the pressure on Iran over its support for Hezbollah and Hamas — at the risk of fuel prices going through the roof in the run-up to the elections — or leave things as they are and the electorate will therefore feel that the Biden administration is not tough enough against the Ayatollah regime.
Iranian exports currently amount to around 1.5 million barrels per day and although China (and not the U.S. or Europe) is its main customer, a reduction in its production would have consequences for the whole world. León calculates that in this scenario of escalating sanctions, some 300,000 barrels per day could disappear from the market. This is a relatively modest figure (0.3% of world consumption), but enough to push the price of crude oil above $95, according to his calculations.
The impact on gas would be much more limited. “It is not rational for prices to skyrocket as they did during the first few days: only the Tamar platform [off the coast of Israel], which is small, has been affected,” says Escribano. “What there is, in all scenarios, is a problem of frustrated expectations: the EU considered Egypt as a possible alternative to imports coming from Russia, and this is complicated in the short term. The pieces were starting to fit together in gas blocks such as [at the Qana site], and hope was building up with other projects in the Eastern Mediterranean.” Now, the expectation is waning.
Tehran enters in full force
Iran’s direct engagement in the conflict is by far the worst possible scenario. It would most probably entail the closure of the Strait of Hormuz, which connects the Gulf of Oman and the Persian Gulf, and through which a third of the crude oil transported worldwide by sea passes. “Some two million barrels per day [2% of global consumption] could be lost, and shipping insurance would shoot up: oil would comfortably go above $120,” argues León.
The ball would be in the court of two other regional powers, Saudi Arabia and the United Arab Emirates, which have ample room to raise production and would have to decide between maintaining their artificial supply cuts or turning on the tap. “To ally with Iran or not,” summarizes the Rystad analyst and former senior OPEC official, who favors the second option. Otherwise, the scenario for the world economy — which begins to suffer when oil prices hit triple digits — would be grim: central banks would raise rates even higher and recession, miraculously avoided so far in 2023, would be virtually guaranteed.
As paradoxical as it may sound, the Saudi regime is the most interested party in keeping prices below $100 per barrel. “A lot of demand would be destroyed. Additionally, they have a lot of money invested abroad and a global recession would be very damaging to their interests,” adds Escribano. Ultimately, Riyadh is the best buffer the West can count on.
Coda: renewables, transcending environmental factors
However, one thing is certain: the overlapping of armed conflicts is, apart from the most obvious environmental issue, a compelling reason to accelerate the green transition. “The mentality must change once and for all: fossil dependence cannot continue. And thinking of the Middle East as a stable supply location is almost as naïve as thinking that Russia was not going to invade Ukraine two years ago,” explains the Elcano analyst.
The way out of the predicament inevitably lies in renewables, which have already become the ticket to the sought-after strategic autonomy of countries that have not won the fossil fuel jackpot. “Now we must avoid repeating the mistakes of the past: there should not be a lithium OPEC, nor rentierism in cobalt,” concludes Escribano. That will be the next chapter. Right now, the U.S., Europe and even China are holding their breath about Israel, Lebanon, Egypt and, particularly, Iran.
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