In a two-week streak, global oil prices have surged, reaching $94 (£77) per barrel, following the unexpected attack by Hamas on Israeli civilians on October 7.
The deadly offensive has sent shockwaves through oil markets, sparking concerns that prices could breach the $100 per barrel threshold. The ongoing situation has reignited fears among oil traders and economists about the potential for increased inflation and the impact on central bank efforts to control it.
Have Oil and Gas Supplies Been Affected?
As of now, there have been no significant disruptions to oil and gas supplies from the Middle East due to the Israeli-Palestinian conflict. While concerns of potential disruptions have driven the recent price increases, oil and gas flows from the region have remained relatively unaffected.
It is worth noting that Israel does not possess significant oil reserves, but it did temporarily shut down production at its Tamar gasfield following the October 7 attacks. This move limited gas exports to neighboring Egypt, which typically sends about half of its gas via seaborne tankers, often to Europe.
Despite Europe having record-high levels of gas storage this winter, gas prices have risen this week after a tanker intending to load liquefied natural gas (LNG) in Egypt left empty and diverted to another port, raising concerns about Europe’s gas supplies.
“The one thing that could really shift the price was if the conflict spreads,” explained Dr. Neil Quilliam, an expert in Middle Eastern energy policy and geopolitics at Chatham House.
How Would an Escalation Affect Energy Markets?
An escalation of the conflict could still impact the region’s oil and gas exports. Observers anticipate the possibility of the U.S. imposing tougher sanctions on oil exports from Iran due to the country’s close ties to Hamas and Hezbollah. Robert Ryan, Chief Strategist at BCA Research, estimates a one in four chance that Iranian oil output could drop by 1 million barrels per day due to stricter U.S. sanctions. He assigns similar odds to a decline in Russian oil production for the same reasons. This could potentially drive oil prices to $140 per barrel in the coming year. However, the impact of these sanctions could be mitigated if Saudi Arabia, which has been limiting its oil output, decides to increase its exports to stabilize the market.
The primary concern remains the security of the Strait of Hormuz, a critical transit route responsible for more than 20% of global oil consumption and a third of the world’s seaborne gas shipments. While it is unlikely that the strait would be completely closed, any military activities in the area could temporarily drive oil prices significantly higher. This has long been a well-debated topic among leaders of Western nations.
Who Are the Major Oil and Gas Producers in the Middle East?
Saudi Arabia holds the most significant influence as a fossil fuel producer in the region. As the de facto leader of the OPEC+ oil cartel, it plays a crucial role in regulating global oil prices by managing production levels. Currently, Saudi Arabia produces approximately 9 million barrels of oil per day. Iran and the United Arab Emirates each produce over 3 million barrels per day. Russia, a key ally of OPEC+, also produces around 9 million barrels of oil daily.
For these nations, surging oil prices can bring economic rewards up to a certain point. However, once prices exceed a certain threshold, the high cost of energy can slow economic activity and reduce oil demand. This could incentivize Saudi Arabia to increase production to stabilize oil prices.
Prior to the attack, Saudi Arabia and Russia had committed to withholding over 1 million barrels of oil per day from the global market until 2024 to support oil prices, which had been facing challenges related to global economic growth concerns. They could reverse this decision if a sudden oil price shock jeopardized overall demand.
What Roles Do the U.S. and Russia Play?
For both the U.S. and Russia, the stakes are significant. Rising oil prices could have political implications for the U.S., particularly in an election year, as it could lead to voter dissatisfaction. For Russia, higher oil prices are essential to bolster the government’s finances amid ongoing conflicts.
Joe Biden’s efforts to mediate a normalization of relations between Saudi Arabia and Israel before the Hamas attacks might have included discussions about increased oil production. However, the current situation in the region has the potential to disrupt such plans. The U.S. has positioned two aircraft carriers in the eastern Mediterranean to deter Iran or Hezbollah, both of which have ties to Hamas, from getting involved in the conflict.