The Iranian refinery in Abadan, in September 2019.Essam Al Sudani (Portal)
The oil crisis of 1973, like the financial crisis of 2008, was more than just a generational shock: rather, it was one of those collective traumas whose consequences are known even to those who have not experienced them. Two overlapping wars – Russia and Ukraine; those of Israel and Hamas – have brought believed spirits back to life. Perhaps, like almost everything these days, with a dose of exaggeration: the ever-cautious International Energy Agency (IEA) has just distanced itself from the oil embargo that has forever changed the energy fundamentals and left scars on everyone’s perspective.
Five decades later, Middle East geopolitics – and the path Iran might take in the conflict – are once again setting the tone for oil and gas. Israel’s fossil production is minimal, but the open tap in the region has put all and sundry on alert: almost one in three barrels consumed daily worldwide leaves this region, which has become a powder keg. What follows is a tour of the possible scenarios that are now open:
Encapsulated war
The confrontation drags on, Israel continues to attack Gaza and fighting continues in Lebanon and Syria. But the rest of the Arab powers are not getting involved in the melee, and this even allows for an eventual and gradual de-escalation. “The delay in the land invasion and the release of some hostages have eased the pressure on the market,” said Jorge León, senior vice president of energy consultancy Rystad Energy and a former senior official at the Organization of the Petroleum Exporting Countries (OPEC).
In this scenario, the most benign crude oil would remain where it is today – and where it was before the Hamas attack – at around $90 a barrel; and gas would, according to calculations by the Norwegian analysis house, settle at around 50 euros per megawatt hour. Central banks would not be forced to raise interest rates again. And the global economy would breathe a sigh of relief.
But even with this alternative, your nerves are on edge. “Unrest in the Arab world would continue, and what happens in the Middle East always has an impact on energy markets,” recalls Gonzalo Escribano, principal investigator and director of the Energy and Climate Change Program at the Elcano Royal Institute. “At this point, accounting for damages is already very important, the unease of the Arab street is clear and that already brings a risk premium: the hope of a normalization of prices after the Russian invasion of Ukraine has disappeared.” The disinflation in the The energy sector will become more complicated, at least in the medium term.
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This last point is important. Until three weeks ago, there was a remarkable expectation of an agreement between Saudi Arabia – the world’s largest crude oil exporter – and Israel, even inviting us to consider an early end to the Gulf giant’s production cuts, a factor in the escalation of the last few months. In the blink of an eye, hope disappeared: “Now the costs of such a step would be prohibitive: the unrest on the Arab streets also reached Riyadh, two weeks ago.” [el príncipe heredero Mohamed] Bin Salmán kept him waiting for seven hours [el secretario de Estado de EE UU, Antony] Blinking before their meeting… The negotiating environment is tight,” concludes the Elcano analyst.
Iran is not directly involved, but there are new sanctions
The Persian state is the key piece in the complicated regional puzzle that has existed since the 7th, and a new round of Western sanctions on its oil production would complicate matters significantly. “The risks remain low… Unless the conflict escalates or the US or Israel directly targets Iranian exports,” Raad Alkadiri, Gregory Brew and Risa Grais-Targow from risk consulting firm Eurasia summarized in a recent note to clients.
“The West has been turning a blind eye to Iranian crude oil for some time to prevent prices from skyrocketing,” says Jorge León from Rystad. And now the US government finds itself in a complicated situation: if the escalation continues, it will face a difficult dilemma. Or redouble pressure on Iran over its support of Hezbollah and Hamas, at the risk of spiking gasoline ahead of the election. Or, on the contrary, it leaves things as they are and voters feel that the Biden administration is not tough enough on the Ayatollah regime.
Iran’s exports now amount to about 1.5 million barrels per day, and although China (and not the US or Europe) is its main buyer, a halt to its production would have consequences for the entire world. León estimates that in this scenario of tightening sanctions, around 300,000 barrels per day could disappear from the market. A relatively small number (0.3% of world consumption), but enough to – according to their calculations – push the price of crude oil to over $95.
The effects on gas would be much more discrete. “It is not rational that prices shot up like they did in the first few days: only Tamar’s platform was affected [frente a la costa de Israel], which is small,” says Escribano. “In all scenarios there is the problem of disappointed expectations: the EU saw Egypt as a possible alternative to imports from Russia, and this becomes complicated in the short term. “There was hope in other projects in the Eastern Mediterranean.” Well, that is passing.
Tehran invades completely
Iran’s direct entry into the conflict is by far the worst-case scenario. This would most likely mean closing the Strait of Hormuz, which connects the Gulf of Oman and the Persian Gulf and through which a third of the world’s crude oil transported by sea flows. “About two million barrels per day could be lost [el 2% del consumo global]and shipping insurance would skyrocket: the price of oil would easily rise above $120,” predicts León.
The ball would be in the court of two other regional powers, Saudi Arabia and the United Arab Emirates, which have large unused capacity and would have to decide whether to maintain their artificial supply cuts or open the tap. “Ally with Iran or not,” summarizes the Rystad analyst and former senior OPEC official, leaning towards the second option. Otherwise, the scenario for the global economy – which begins to suffer when oil prices reach triple digits – would be bleak: central banks would raise interest rates even further and a recession, miraculously averted so far in 2023, would be virtually certain.
As paradoxical as it may sound, the Saudi regime’s first concern is to ensure that prices do not rise above $100 per barrel. “A lot of demand would be destroyed. “In addition, they have invested a lot of money abroad and a global recession would be very damaging to their interests,” says Escribano. In short, Riyadh is the best emergency brake the West has.
Coda: renewable energies, beyond the environment
Scenarios aside, there is a demonstrable reality: the overlap of war conflicts is above all – and apart from the most obvious environmental problems – a compelling reason to accelerate the green transition. “We must change our mentality once and for all: dependence on fossil fuels cannot continue. And viewing the Middle East as a place of stable supply is almost as naive as thinking two years ago that Russia would not invade Ukraine,” says the Elcano analyst.
The way out of the labyrinth is, yes or yes, through renewable energies, which have already become the key to the long-awaited strategic autonomy of countries not favored by the fossil lottery. “Now we must avoid repeating the mistakes of the past: that there is no OPEC for lithium and no rent-seeking for cobalt,” says Escribano. That will be the next chapter; Now the United States, Europe and even China are holding their breath in Israel, Lebanon, Egypt and, above all, Iran.
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