What’s next for Israel, the Middle East and oil prices?

After the killing of hundreds of Israeli citizens on October 7 by the Iranian terrorist organization Hamas, escalation to full-scale war in the Middle East never seemed far away. After the escalation of attacks in recent weeks between Israel and Iran’s terrorist proxy in Lebanon, Hezbollah, it seems even closer. So what’s next for Israel, Iran and its proxies and the Middle East, and what will happen to the price of oil?

The immediate danger of escalation comes more from the ongoing Israel-Hezbollah conflict than from the ongoing Israel-Hamas war, according to senior US and European Union (EU) energy security sources who spoke exclusively OilPrice.com last week. “Hamas’ usefulness to Iran diminished after the October 7 attacks (on Israel) and was further diminished after Israel’s push into Gaza and its removal of several key figures from the (Hamas) organization, so now its main goal (for Tehran) it is photo-propaganda,” the EU source said. “But Hezbollah is still full of possibilities for Iran, and the further Israel takes the fight in Lebanon, the better for Tehran,” he added. As it stands now, the stated goal of Israel’s strategic intentions against Hezbollah is to return the approximately 60,000 Israelis who were evacuated last year from the northern part of Israel, which borders southern Lebanon. As they have been displaced from the region due to ongoing rocket attacks by Hezbollah, this objective can only be achieved by neutralizing the Iranian-backed group at some distance from these Israeli residents. This will require a significant ongoing push, for at least several months, by troops, tanks and other support vehicles on the ground in Lebanon.

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Legally, this would be consistent with the terms of UN Resolution 1701 which prohibited Hezbollah from operating south of the southernmost stretch of the Litani River, which flows 15 to 20 miles north of the Israeli-Lebanese border, but which Hezbollah has largely ignored since then. However, the practical considerations of such a strategy are less clear. As many invading forces have discovered over the centuries, getting into an area is easy enough – what they do once there can be difficult, and getting out again can be even more difficult. For Israel, this is extremely likely to be the case, despite the high-level, battle-proven armed forces it has, backed by the best military hardware and software currently available anywhere. Israel has also greatly improved its chances of making relatively significant short-term ground gains by neutralizing several key figures in Hezbollah’s command structure, notably including Hassan Nasrallah. In an open battle, there is no doubt that Israel will win, but most of the military action taken in Lebanon will be of the guerilla type from the outset, either in urban terrain or in the hilly terrain that is extremely well known to Hezbollah and well developed. for its combat requirements. This would include heavily fortified camouflaged positions, hundreds of secret ammunition and fuel supply points, and several networks of tunnels. Another complicating factor is Hezbollah itself, which has a different military order than Hamas, with about 100,000 fighters in its force, a huge arsenal of weapons, including up to 200,000 missiles and rockets, and a key recipient of Iranian aid. This includes training its fighters and providing short-, medium- and long-range unguided ballistic missiles and short-range guided ballistic missiles capable of hitting all of Israel’s major population centers. The history of the war against Israel stands out as a unique success among its Middle Eastern neighbors, having driven Israeli forces out of Lebanon in 2000 and fighting them again in 2006, at that point in a stalemate.

A full-fledged and sustained attack by the Israeli military in Lebanon would be highly unlikely to be met with direct official opposition on the ground from Iran or its sustained direct attacks on Israel, the US energy security source said. “It clarified the degree of retaliation that could be brought against him if certain courses of action were taken,” he said last week. However, Iran has several other avenues of action to step up pressure on Israel and its Middle Eastern allies, all of which could push oil prices much higher, very quickly. One of the most effective would be to reiterate his call for an embargo on oil exports to Israel’s allies by Islamic OPEC members. Saudi Arabia did the exact same thing in 1973 for the exact same reason – a war between Israel and Islam, as it tried to portray it – with devastating results for the price of oil, as fully discussed in my latest book on the new global oil market. command. In 1973, Egyptian military forces moved into the Sinai Peninsula, while Syrian forces moved into the Golan Heights — two territories that had been captured by Israel during the Six-Day War of 1967. Attacking from multiple points in the holiest day of the Jewish faith, Yom Kippur (the same method of attack and the same religious date as the October 7 attacks Hamas used 50 years later), the two Arab countries thought they could catch Israel off guard, which which they did at least for a while. Crucially, however, around the same time, OPEC members – plus Egypt, Syria and Tunisia – began an embargo on oil exports to the US, UK, Japan, Canada and the Netherlands in response to their collective supply of weapons. , intelligence resources and logistical support for Israel during the war. As global oil supplies fell, the price of oil rose dramatically, exacerbated by the progressive cuts in oil production by OPEC members during the period. Gas prices have also risen because, historically, about 70 percent of them are made up of the price of oil. By the end of the embargo in March 1974, the price of oil had risen by about 267 percent, from about $3 per barrel (bp) to nearly $11 bp. This, in turn, has fueled a global economic slowdown, felt particularly in the net oil-importing countries of the West.

A similar effect on the economies of Israel’s key Western allies could be achieved by Iran using another Middle Eastern proxy, the Houthis. Broadly speaking, the net impact of the group’s ongoing disruption of shipping through the key regional oil transit point in and around the Red Sea has not been as great as Iran would no doubt have wished. In part, this was due in recent months to the avoidance of the area by many major oil companies who decided to use the longer Cape of Good Hope route instead. In part, this can be attributed to the increased security in the region’s waters by the US and its allies late last year in the form of “Operation Prosperity Guardian”. This multilateral naval task force was designed precisely to protect against such future Iranian or Houthi attacks on oil shipping in the Red Sea region. Indeed, IMF PortWatch data shows that average daily vessel transits through the Bab al-Mandab Strait on the Red Sea route were 23 in the week ending August 11, 2024, compared to 70 on the same day last year. However, it could have a much greater impact if the Houthis were to launch attacks on major oil fields and/or refineries in any nearby country, especially Saudi Arabia. The last time the Houthis launched major coordinated attacks against mainland Saudi Arabia — on September 14, 2019 against the Abqaiq oil processing facility and the Khurais oil field — Saudi Arabia’s oil production was cut in half, causing the largest increase during the day in US dollars. since 1988, as detailed in my latest book.

Exactly what different scales of action could mean for oil prices was defined by the World Bank shortly after the October 7 Hamas attacks. It said a “small disruption” – with global oil supplies being cut by 500,000 to 2 million bpd (roughly the same as the drop seen during the Libyan civil war in 2011) – would lead to oil prices initially rising by 3-13%. A “medium disruption” – involving a supply loss of 3 to 5 million bpd (roughly equivalent to the 2003 Iraq War) would increase oil prices by 21-35%. And a “big disruption” — with a drop in supply of 6 million to 8 million bpd (like the drop seen in the 1973 oil crisis) — would send oil prices up by 56-75 percent.

By Simon Watkins for Oilprice.com

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