Nothing has more potential to disrupt the world’s energy picture than conflict in the Middle East.
And conflict in the Middle East has emerged again, in a major way.
Hamas militants invaded southern Israel on Oct. 7, staging their attack from the Palestinian enclave of Gaza. In addition, more than 3,000 missiles were launched into the county, landing as far north as Tel Aviv, according to the Israeli military.
Israel responded with a series of airstrikes against Hamas, then declared a state of war. Months of bloody and often intense bombardments and fighting within Gaza followed.
Industry observers noted the conflict began exactly 50 years to the month after the Arab-Israeli Yom Kippur War and the 1973 Arab oil embargo.
In global energy, initial effects of the Israeli-Hamas war were minimal.
Some natural gas supply from the eastern Mediterranean area moves through Israel to neighboring countries, primarily Egypt. Chevron briefly shut down its Tamar offshore gas field at the request of Israel’s Energy Ministry but had resumed production by Nov. 13.
The company then announced that gas flows through the East Mediterranean Gas pipeline from Israel to Egypt would resume after a month-long stoppage due to the combat.
“On the surface of it, Israel and the Gaza Strip aren’t big players in the world energy picture. Even in the global gas trade, it’s pretty small,” said Mark Finley, a former senior economist at BP who led production of the BP Statistical Review of World Energy, now a fellow in energy and global oil at Rice University’s Baker Institute.
“The reason people are worried about this is the neighborhood,” Finley said.
That neighborhood is home to some of the world’s biggest oil producers, including Saudi Arabia, the kingpin of the OPEC+ oil cartel.
By mid-December, concerns over oil-supply disruptions were growing because of attacks on tankers in Red Sea shipping lanes by Yemen-based Houthi rebels. Some companies, including BP, suspended shipping through the area because of the drone and missile attacks.
In its Commodity Markets Outlook issued recently, the World Bank outlined three energy disruption scenarios that could arise “if the (Israeli-Hamas) conflict were to escalate” and involve other countries in the region.
With even a small disruption, the agency reported, world oil supply could be reduced by 500,000 to 2 million barrels per day and oil prices would initially increase from 3 to 13 percent relative to the current quarterly average, to a range of $93 to $102 per barrel.
It predicted a medium disruption could reduce oil supply by 3 million to 5 million barrels per day, moving prices higher to between $109 and $121 per barrel.
And in the least likely but most damaging, large-disruption scenario, comparable to the Arab oil embargo of 1973, world oil supply would drop 6 million to 8 million barrels per day, possibly sending prices to between $140 and $157 per barrel.
“Policymakers will need to be vigilant. If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades – not just from the war in Ukraine but also from the Middle East,” said Indermit Gill the World Bank’s chief economist and senior vice president for development economics.
The Arab oil embargo of October 1973 targeted Western countries that had supported Israel in the Yom Kippur War, initially the United States, Canada, the United Kingdom, Japan and the Netherlands. World oil prices increased sharply and remained high even after the embargo ended in March 1974.
By contrast, the price of Brent and other benchmark crudes rose about $5 a barrel in the days following the Hamas attack, then began several weeks of decline, at one point falling as much as $12 from recent highs.
Analysts attributed that price drop to a buildup in crude inventories and concerns about a global economic slowdown.
Robert Vitalis is a professor in the Perelman Center for Political Science and Economics at the University of Pennsylvania. He has written several books on social structure and energy, including the contrarian study “Oilcraft: The Myths of Scarcity and Security that Haunt U.S. Energy Policy,” published in 2020.
“I would refrain from all nightmare scenarios that are the stock in trade of folks who don’t really know much about energy markets, but think that their ideas about vulnerable choke points and the like have even a shred of credibility,” Vitalis said.
“As you know, oil prices are down, not up,” he noted.
Vitalis said the 1973 oil embargo revealed a globally integrated oil market, “as all economists now recognize,” and showed that withholding crude from selected markets has only a marginal impact in the long term.
“The crisis as we think about it was not due to an embargo, which was ineffective and soon called off,” he commented.
“The Arab oil producers – Iraq excepted, since it never embargoed anyone – learned their lesson, although they were pretty clear about it even then. But politics won out for the moment over economic rationality,” he added.
Without efforts to coordinate production, like those of OPEC+, oil prices might be a little less high at the peaks and a little lower at the troughs, but with a great deal of variability, Vitalis said.
“Sometimes commentators again cut corners and talk about Saudi Arabia or OPEC or OPEC+ ‘controlling the price,’ which they don’t in fact do. The largest variance in prices, as in the case of all other commodities, is macroeconomic factors,” he explained.
“After all, the production quotas that OPEC+ agreed upon haven’t stopped the fall in oil prices,” he said.
Really, we’d all be better off if we just stopped thinking that oil producers do things for political reasons,” Vitalis added.
Finley noted that the world oil supply picture is significantly different now than it was 50 years ago, at the time of the oil embargo. Also, the United States today is “dramatically less energy intensive in the way we use oil,” he said.
Saudia Arabia and other Gulf oil producers “were clearly telegraphing they were going to use oil as a weapon in 1973: ‘Don’t support Israel or we’ll do this.’ Now it’s just the opposite. They’re saying, ‘We don’t want to politicize oil,’” Finley said.
The Iran Factor
Some energy analysts have focused on friction between the United States and Iran as more likely to disrupt world energy than the Israeli-Hamas war. Following the outbreak of fighting in Gaza, the United States carried out a series of strikes in eastern Syria against targets reportedly affiliated with the Iranian Islamic Revolutionary Guard.
In a mid-November interview, former U.S. Defense Secretary Mark Esper said countering Hamas would necessarily require confronting Iran.
To “ultimately defeat Hamas, in the extent that we understand in military terms, you have to prevent their ability to reconstitute their military forces,” Esper said.
“To do that, that means you have to deal with Iran once and for all. You have to cut off the supply of arms and money and other support. And that’s the bigger issue that we’re not facing,” he added.
Finley commented, “It feels like right now, to me, the road to broadening this leads through Tehran.”
“The risk is that the crisis in the region spirals out of control. And to a lot of people, the risk is that Iran will instigate that,” he said.
The first two months of the Israel-Hamas conflict had little effect on the world energy picture, but the possibility of a longer-term energy supply disruption can’t be categorically dismissed.
“It doesn’t pay to be too categorical, given the risk,” Finley observed.