Financial markets and policymakers are complacent about developments in the Middle East and their effects on energy markets. The market price for oil for future delivery is trading around the mid-sixties per barrel, well below the spot price and below the average inflation-adjusted price for two decades.
Despite the growth of renewables, especially solar and wind power, oil and gas, alongside coal, remain the staple source of energy underpinning modern economies and societies. Currently, the world consumes around 100 million barrels of oil daily (around 50 percent for transport and 20 percent for petrochemicals). No significant decline is forecast due to limited alternatives for heavy transportation and as a chemical feedstock. Natural gas is around 23 percent of the world’s total energy consumption and provides a quarter of global electricity.
The Gulf region is the world’s most important energy producer, accounting for around 50 percent of proven reserves. It produces around 33 percent of the world’s oil and approximately 17 percent of natural gas. Any severe disruption would affect availability and price flowing through to economies.
The absence of concern comes from a perception of ample supplies. In the leadup to the current crisis, OPEC, driven by Saudi pressure, increased output, causing sharp declines in price exacerbated by slowing demand from decelerating economic activity, particularly in China. In a repeat of 2015, Saudi Arabia sought to punish producers who exceeded quotas agreed upon between member states. It may have been to placate President Donald Trump, who has consistently sought lower oil prices. Saudi Arabia’s objective is to maintain its market share as low prices make US shale oil and gas uncompetitive and accelerate the use of a potentially stranded resource.
The spreading conflict alters the equation. There is increased stockpiling and consumption—military aircraft are not designed for fuel efficiency. The most serious threat comes from collateral damage to energy facilities or the weaponisation of oil and gas supplies.
Israel, whose declared objective is destroying Iran’s nuclear capabilities and unseating its leaders, may target oil and gas facilities to increase pressure on the regime. Iran exports up to 2 million barrels of oil and refined petroleum products daily (around 2 percent of total oil supply). This loss may not be covered by other producers whose capacities are already strained due to lack of infrastructure, in part because of under-investment in the shift away from fossil fuels. Only Saudi Arabia, the UAE and Russia, whose capacity is hobbled by sanctions, may have actual additional available capacity.
The US entry into the war has changed its dynamics. Iran may seek a total or selective blockade of the Strait of Hormuz—the chokepoint of global energy supplies—through which a fifth of the world’s oil supply passes. A long-standing rule in the Persian Gulf states is that if Iran is under threat, it will seek to prevent regional competitors from selling their oil. Even though free passage is still theoretically possible, many shipping companies are already reluctant to transit the narrow waterway due to insurance concerns. The charter costs of large crude carriers (capable of carrying 2 million barrels of oil) from the Gulf to China have more than doubled (from around $20,000 to just under $48,000 per day).
Another option is to attack other Gulf nations’ oil facilities, which has happened previously. American and Israeli military bases in these countries increase this risk. Iranian-backed domestic militias, already in place, could undertake these attacks. Iraq, which supplies over 4 million barrels of oil per day, is vulnerable due to the location of its infrastructure in Basra, close to Iran, and the history between the two nations.
Iran will be reluctant to attack Gulf neighbours with whom they have carefully re-established relations and a modus vivendi over recent years. This suggests another option—a coordinated oil embargo on the US, Europe and supporters of Israel.
While Arab unity is elusive and never guaranteed, there is a historical precedent—the 1973 oil embargo by Arab members of OPEC in response to the Yom Kippur War and the US support for Israel. The crucial players are West-leaning Saudi Arabia, the UAE and Qatar. Despite competition with Iran for regional influence and the Sunni and Shia schism, there are reasons that these nations may act.
First, they fear regional instability if the present Iranian regime is toppled. Iraq, Afghanistan and Syria highlight the West’s lack of staying power and appetite for casualties and cost to engineer the outcome they state.
Secondly, Western denial of Iran’s right to even peaceful nuclear capabilities affects the ambitions of at least Saudi Arabia and the UAE. It leaves the region subservient to Israel as its only nuclear-capable actor consistent with Washington’s policy to preserve Israeli military superiority.
Thirdly, Israel and its supporters’ desire for regime change in Iran and potential replacement by the scions of the Shah will alarm Gulf monarchies because they will exist at the behest of foreign powers and can be displaced at the whim of the West. Given the volatile foreign policies of the US and its allies, including their backing of the ill-fated Arab Spring, this possibility is non-trivial. As Hosni Mubarak discovered, US support exists until it doesn’t.
Fourthly, America’s confiscation of Russian assets, tariffs, and economic policies have created unease about Western investments in the Middle East. The Gulf states have already begun to favour domestic projects over foreign investments.
Finally, the Gulf population, excepting the rulers and their acolytes, is predominantly pro-Palestinian and anti-American. Siding with Israel and the West is existentially dangerous for the internally fractious ruling families, irrespective of their repressive domestic policies.
Higher oil prices would financially benefit producers struggling to balance budgets at current levels. An embargo which did not affect their energy supplies would be supported by non-aligned nations, who oppose the wars in Gaza and Iran and Western interference.
Israel and its allies should remember Thucydides’ Melian Dialogue, which records Athens’ conquest of Melos. The Melians unsuccessfully resisted, suffering horrific losses. Athens believed that “the strong do what they can and the weak suffer what they must”, and they could act with impunity because their power was complete. Less than three years later, Athens suffered a military disaster in Sicily from which they never recovered.
Satyajit Das | Former banker and author
(Views are personal)