Smoke rises following an Israeli air strike in Gaza City, on Oct. 12.Hatem Moussa/The Associated Press
Hamas’s invasion of southern Israel on the weekend pushed oil prices up by almost US$5 a barrel, sending jitters through the energy markets and triggering dark thoughts of shortages and another round of nasty inflation. The scare proved overblown. Oil sank the next day and traded at US$89 a barrel on Friday, a few bucks above its prewar level but still well below its year peak.
The savage war between Hamas and Israel has not unleashed an energy crisis on the heels of the one that erupted after the Russian invasion of Ukraine. The war will not evolve into a repeat of 1973, when OPEC used an oil embargo against the United States, Canada, Britain, Japan and other countries to punish them for their support of Israel in the Yom Kippur War. Oil quadrupled and the economic shock sent consumer prices soaring, followed by years of stagflation.
Gaza, which is under total blockade by Israel, produces no oil and Israel has almost no homegrown supply (though lots of offshore natural gas). While oil prices are high, there is little sense so far that they could rise above US$100 even if Israel launches a ground invasion of Gaza, which seems likely as troops and armour amass on the borders of the 40-kilometre long strip. On Friday, the Israeli military called for the evacuation of more than one million Gazans in the northern section of the strip.
Energy anxiety over? Not quite – Iran is the wild card.
A war that would see Iran and its anti-Israel proxies in Lebanon, Syria and elsewhere in the Middle East swing into action could see the whole region erupt, with predictable results on the oil prices. Iran is a member of OPEC, controls 17 per cent of the cartel’s proven oil reserves and, with rising output, is now its fourth-largest producer. The International Energy Agency estimated that Iran last December produced 2.7 million barrels a day, up from a mere 400,000 in 2020, when the sanctions slapped on the country by then-U.S.-president Donald Trump virtually crippled its energy industry.
Those sanctions were eased somewhat by the administration of President Joe Biden in an effort to prevent runaway prices as Saudi Arabia, OPEC’s top producer, and associates including Russia implemented production cuts designed to do the opposite of what the United States wanted.
Iran supports Hamas, which has ruled Gaza since 2007, when it won a violent power struggle with the West Bank-based Palestinian Authority. But Iran is not thought to control Hamas’s strategy or attacks. Iran’s main regional proxy is Hezbollah, the political party and formidable guerrilla army in Lebanon, which was formed just after 1982, when Israel invaded the southern part of the country.
Already, there are worrying signs of renewed conflict between Hezbollah and Israel as Israel vows to eradicate Hamas – “Every Hamas member is a dead man,” Israel Prime Minister Benjamin Netanyahu said on Wednesday.
Hezbollah and Israel traded fire along the border throughout the week, with a few deaths reported on both sides, though there is little sign that full-scale battles are imminent. Still, Israel is taking no chances and is moving reservist forces and armour to towns along the Lebanese border. At the same time, Syrian state television reported that Israel hit airports in Damascus and the northern city of Aleppo.
On Thursday, U.S. Secretary of State Antony Blinken warned the Islamic countries and the Iranian proxies in the region not to “take advantage” of the crisis and attack Israel. He urged Israel to exercise restraint as the threat of a regional war increased even as the United States sent planeloads of weapons to the Israel Defence Forces.
What was not known on Friday – six days after Hamas broke through the Gazan border fence and massacred more than 1,000 Israelis – is how Iran and its regional proxies would react if Israel, which has already flattened large parts of Gaza City, mounts a full-scale invasion of the strip in its pursuit of eradicating Hamas.
The omens are not good. Earlier this week, Iranian President Ebrahim Raisi said that his country fully supports the Palestinian right to self-defence and accused Israel, not Hamas, of being the main danger to the region. He praised the Hamas gunmen for their “courage, bravery, resistance and initiative.” The question is whether that praise would see Iranian proxies attack Israel.
Bloomberg Economics estimated that a “confined” war – one limited to the invasion of Gaza – would see oil prices rise by about US$4 and have a negligible effect on global growth and inflation; a wider war involving Iranian proxies could shoot prices up by double that amount and push down global GDP by 0.3 percentage points; a direct Israel-Iran conflict could push oil up by US$64, to about US$150, hit global GDP by one point and boost inflation by 1.2 points. The doomsday scenario is highly unlikely but no longer unthinkable as tempers flare throughout the Middle East and the body count rises in Gaza and Israel.
While the oil markets did not reflect an energy crisis scenario in recent days, not even close, the natural-gas markets are already on edge. On Thursday, gas prices hit their highest level since March after rising some 30 per cent since last weekend’s Hamas attacks. The price spike came when Israel’s Energy Ministry ordered the American oil giant Chevron to suspend gas production at the Tamar gas field off Israel, not far from the Gaza coast. About a third of Israel’s offshore gas is exported to Egypt, where much of it is turned into liquefied natural gas for export to Europe.
An oil jolt could be next. Wars are never predicable, and certainly the one between Hamas and Israel is not. Already, too many regional “actors” are involved, to use the jargon of economists, and all of them are angry and armed to the teeth.