12.12.2023
Oil in Middle East Conflict
On the eve of the summits of the League of Arab States (LAS) and of the Organization of Islamic Cooperation (OIC), many experts discussed the possibility of introduction of an embargo on oil supplies from these countries to Israel, the USA and the European Union, proposed by Iran. These concerns have never materialized. The summits of the LAS and OIC countries in Riyadh on November 11, 2023 resulted only in demands to stop arms supplies to Israel and in condemnation of the “Israeli aggression against the Gaza Strip”.

1973 experience, when the actual embargo due to the Arab-Israel Judgement Day War was implemented, had shown the real effect of such pressure: global oil prices had soared. Any rapid oil price rise in the current situation would hit not only those who were targeted with these measures, but also would harm the countries-partners of oil producing countries, and China is the first country that comes to mind here. And it just so happens that China maintains a peaceful position, calling upon all sides in the Palestine-Israel conflict to enter peace talks. This is why the oil embargo issue fell through on its own.

However, there are also other reasons why the current Middle East conflict is a threat to the oil market. Western countries are worried that Iran may enter the fray, and for now Iran is acting through its proxies in Lebanon, Syria and Yemen. The degree of actual Iran’s control over Hezbollah, pro-Iranian groups in Syria and Iraq, as well as over Yemeni Houthis, is still an open issue. According to Iranian officials, they do not exercise full control over these. But who knows … These Iranian proxies keep reminding the world of themselves. Reports of missile launches from Lebanon and Yemen are coming in almost daily. And these groups are rather active in Iraq and Syria: in less than a month the US troops in these countries have been attacked 55 times.

The longer Israel runs its cleanup operation in the Gaza Strip, the more likely is Iran’s involvement in the conflict, despite popping up press reports of Iranian authorities being unprepared for this scenario. Just recently Reuters has quoted three Tehran’s high officials and reported that the supreme leader of Iran had sent a clear message to the head of HAMAS, when they met in Tehran in early November: “You hadn’t warned us of the attack on Israel on October 7, and we will not go to war in your name”. But at the same time it was stated that Iranian political and financial support would continue.

The experience of world wars shows that conflict escalation increases likelihood of unpredictable events, drawing in more and more players, even those who initially had no interest in such participation whatsoever.

In this case Western analysts forecast a local oil price surge, just like the price surge during the Desert Storm in 1990. Tougher forecast options like military operations in the Persian Gulf or blockage of the Strait of Hormuz are considered by analysts significantly less often. That’s the reason the oil price has been steadily declining since October 20, as if there were no conflict in the Middle East at all. Even the statements by the Lebanese Hezbollah leader on being ready to enter into the war have not made any major changes in the oil price dynamics.

However, risks are real in the case of conflict escalation, and being unprepared for these risks raises risk realization probability. According to the EIA, the daily throughput of the Strait of Hormuz, controlled by Iran, makes up for about one fifth of the global oil production. This is a strategically significant waterway, connecting Middle Eastern crude oil producers with key markets all over the world. Forecasts by the Bank of America suggest that in the case of the closure of the strait, oil prices could skyrocket over $250 per barrel.

Even the statements by Houthis that they are ready to attack any Israeli ships, including civilian vessels, in any other time would cause stress and expectations of chaos on the market, should their promises come true, but not today. What is happening? Why the market that has been sensitive to conflicts in oil-producing countries and even to verbal interventions, is now indifferently watching the current developments? Is it accumulated fatigue from constant shocks? Is it a looming economic depression, which will be followed by lower energy resource needs? Or is it being sure that the whole situation is controllable?

It is likely that all of the above factors are true. Markets also show that no country in the region is preparing for a major war. As for the Strait of Hormuz, blocking it off would be disadvantageous for Iran due to political considerations. The Gulf is used to transport crude oil from Persian Gulf countries, with which the IRI has just recently started building partnership relations. It would be dangerous to ignore interests of neighbors following kick-off of cooperation activities after a long standoff. Let me remind you, that in March 2023 Iran and Saudi Arabia signed an agreement on restoration of diplomatic relations, these talks were mediated by China and this pivotal document was signed in the capital city of China.

Arab and Moslem countries are planning to strangle Israel slowly, avoiding risks to the energy market and to their extremely important counterparty – China.

It can be said that the world is being transformed with consideration to interests of the new global hegemon.

Yekaterina Borisova, PhD in History, SRF of Institute of Oriental Studies of the Russian Academy of Sciences