Eve is here. We feature Simon Watkins again on the strong views of neoconservatives tied to the oil industry. Watkins claims to have connections with industry insiders, so his commentary remains influential, even if readers rightly choose to dispute certain alleged facts or analyses. It is likely to reflect the company’s perspective. It is interesting, then, that he acknowledges that Western sanctions against Russia have hurt Europe and discusses the harm Iran could do with different types of oil embargoes.
Written by Simon Watkins, former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Foreign Exchange Institutional Sales and Trading at Credit Lyonnais and later Director of Foreign Exchange at Bank of Montreal. He went on to serve as Weekly Publishing Director and Lead Writer for Business Monitor International, Director of Fuel Oil Products at Platts, and Global Editor-in-Chief of Research at Renaissance Capital in Moscow. It was first published in oil price.com
- A war between Israel and Hamas could cause significant disruption to global oil markets, similar to the 1973 oil crisis.
- Iran could retaliate through an oil embargo or attacks on key oil facilities, potentially severely impacting global oil supplies and prices.
- So far, China’s influence has prevented a full-scale oil embargo as it prioritizes economic recovery and stable relations with the West.
As with the Russia-Ukraine war, a key element in the Israel-Hamas war (and the underlying conflict between Israel and Hamas’ sponsor Iran) is oil. The question of how Europe’s core countries would sustain their economies if Russian oil and gas flows were completely sanctioned has long threatened to derail Western responses to growing Russian aggression in Europe. What happened is fully analyzed in my latest book on the subject. new world oil market order. The question of whether Iran’s response to increased Western and Israeli action against Iran and its terrorist proxies will include operations directly targeting the world’s oil sector is a question not seen since at least the 1973/74 oil crisis. It threatens to disrupt the oil market of a kind that never existed.
The similarities between the beginning of current events in the Middle East and events prior to the 1973 oil crisis are striking. At the time, on Yom Kippur, the holiest day of the Jewish faith, Egyptian troops advanced into the Sinai Peninsula, while Syrian troops invaded the Golan Heights (two territories occupied by Israel during the 1967 Six-Day War). advanced. This was the same multi-pronged attack technique and religious date as the October 7 Hamas attack that Hamas used 50 years later against targets across Israel. When two major Arab states attacked Israel in 1973, the conflict became more religious than simply about regaining lost territory, and further involved the region’s Muslim countries. Military and other assistance poured into Egypt and Syria from Saudi Arabia, Morocco, Algeria, Jordan, Iraq, Libya, Kuwait, and Tunisia until a UN-brokered ceasefire ended the war on October 25, 1973. However, this was not the end of the conflict in a broader sense. The oil export ban to the United States, United Kingdom, Japan, Canada and the Netherlands comes in response to major members of the Organization of the Petroleum Exporting Countries (OPEC), particularly Saudi Arabia, jointly supplying arms, intelligence and logistics to Israel during the war. This was imposed by the government. war. By the end of the embargo in March 1974, oil prices had increased by approximately 267%, from approximately US$3 per barrel (pb) to nearly 11 pb. This has led to a global economic slowdown, especially felt by net oil importing countries in the West.
Early in the current Israel-Hamas war, Iran called for a similar oil embargo against fellow Israeli supporters by Muslim OPEC members. At that time, and to this day, such calls have fallen on deaf ears, largely due to pressure from China, the current major superpower in the Middle East. So far, two reasons are believed to be valid for Beijing’s move to keep OPEC members in the Middle East away from these embargoes. First, China, which has been the world’s largest gross oil importer since 2017, could threaten its economic recovery, which is still struggling in the aftermath of the coronavirus. Furthermore, Western economies remain important export zones with the United States. It alone still accounts for more than 16 percent of export earnings. According to a European Union energy security executive who spoke exclusively: oil price.comIf Brent oil prices trade above $90-95 per barrel for more than a quarter of a year, the economic damage to China will increase dangerously. The second reason is that the United States has previously pressured China not to approve price-destroying embargoes. The economic and political implications for Washington would be at least as dire as those for China. Detailed in my latest book.
That said, there are other options open to Iran to seriously disrupt global oil markets in the coming weeks. One of the earlier most successful attacks was carried out by the Iranian-backed Houthis, based in Yemen, on a major oil facility in Saudi Arabia. On September 14, 2019, the Houthis launched several missiles against Saudi Arabia’s Abqaiq oil processing facility and Khurais oil field, halving Saudi Arabia’s oil production (for much longer than it would like to admit) and reducing the U.S. dollar caused the largest increase in the However, China’s efforts to secure a seamless route for the broader Belt and Road Initiative across the Middle East have since become a key factor in mitigating the threat of this option being used again. This was a landmark resumption of relations agreement that ultimately saw two major Muslim powers (Sunni Saudi Arabia and Shiite Iran) restore diplomatic relations and reopen embassies in each other’s countries, both rivals in the region. culminated in a kind of reconciliation between the two countries. Iran could use the Houthis to dramatically increase the level of aggression in and around the Red Sea region for a period of time, but it also could use the Houthis to disrupt oil shipments through key chokepoints in the region. The impact of the organization’s recent efforts has not been as great as in Iran. Iran would have wanted it too. This is partly due to the avoidance of the area by many major oil companies, and partly because the United States and its allies increased security in the region towards the end of last year.
However, the cumulative impact of such an increase, in parallel with the closure of the Strait of Hormuz, the region’s other major shipping route, could have a significant impact on oil prices. The Iranian-controlled strait is the only sea route from the Persian Gulf to the open ocean, so historically at least a third of the world’s crude oil supplies have passed through it. Only Saudi Arabia and the United Arab Emirates (UAE) operate pipelines that can bypass the strait, but Iran’s own Goreh-Jask pipeline could also bypass the strait if supplies are disrupted. analyzed in my latest book. The strait is extremely narrow in places, meaning that tankers traveling through it are relatively easy to attack by other vessels from the waterway or from the coastline, and Iran has been attacked for several reasons in the past. has threatened to cut off oil supplies through the strait. The most obvious one has to do with increased sanctions.
Nevertheless, as seen at various stages after Russia’s invasion of Ukraine, Western countries are taking direct steps to fill the supply gap in the oil market in the event of such an action. However, it may not last more than a few months. . The U.S. Strategic Petroleum Reserve (SPR) currently stores approximately 383 million barrels of oil, which will be used to trickle into global supplies as from February 24, 2022 onwards. There is a possibility. Members of the International Energy Agency (IEA), whose collective strategic oil reserves currently stand at around 1.2 billion barrels, could once again be drip-fed into global supplies, as has happened since early 2022. The IEA stipulates that member countries have oil reserves equivalent to at least 90 days of net oil imports, which are readily available for use in emergencies. This definition of surplus capacity generally cannot be applied to Saudi Arabia’s own claims to surplus capacity. Explained in detail in my latest bookHowever, OPEC as a whole may have real capacity left, especially given the ongoing production cuts. Recent industry estimates suggest that this total OPEC spare capacity could amount to about 3-4 million barrels per day.
A sign of what would happen to oil prices if there were significant declines in any of these alternative supply channels was drawn by the World Bank early in the Israel-Hamas conflict. The report found that a “small disruption” that reduced global oil supplies by 500,000 to 2 million barrels per day (roughly the same decline seen during the Libyan civil war in 2011) would initially reduce oil prices. He said it would increase by 3% to 13%. . A “moderate disruption,” or a supply loss of 3 million to 5 million barrels per day (roughly equivalent to the 2003 Iraq war), would cause oil prices to rise by 21 to 35 percent. And in the event of a “disruption” characterized by a drop in supply of 6 to 8 million barrels per day (as seen in the 1973 oil crisis), oil prices would rise by 56 to 75 percent. Probably.
