Yves here. We also feature Simon Watkins with his views on neocon power linked to the oil industry. Watkins presents himself as having connections to industry insiders, so his comments, whether readers rightly choose to dispute certain stated facts or analysis, nevertheless likely reflect the opinion of influential players. Given that, it’s interesting to see him open up a piece about the damage Iran can do with various types of oil embargoes while acknowledging that Western sanctions on Russia are damaging Europe.
By Simon Watkins, former major FX trader and trader, financial journalist, and best-selling author. He was the Head of Sales and Trading of the Forex Center for Credit Lyonnais, and later the Director of Forex at the Bank of Montreal. During that time he was Head of Weekly Publications and Senior Writer for Business Monitor International, Head of Oil Products for Platts, and Managing Editor of Renaissance Capital Research in Moscow. Originally published on OilPrice.com
- An Israel-Hamas war would cause a major disruption in the global oil market, similar to the 1973 Oil Crisis.
- Iran could retaliate with an oil embargo or attack on key oil facilities, which would have a severe impact on global oil supply and prices.
- China’s influence has so far prevented a complete oil embargo, as it prioritizes its economic recovery and stable relations with the West.
As with the Russia-Ukraine War, an important part of the Israel-Hamas War (and the ongoing conflict between Israel and Hamas’ sponsor, Iran) is oil. The question of how European countries will keep their economies afloat if the flow of Russian oil and gas is fully sanctioned has long threatened to derail the Western response to Russia’s increasing aggression in Europe, as analyzed in detail in my recent book on global new oil. market order. The question of whether Iran’s response to escalating Western and Israeli actions against it and its terrorist proxies will include operations aimed directly at the global oil sector threatens chaos in the oil market of a kind not seen since at least the 1973/74 Oil Crisis.
The parallels between the onset of current events in the Middle East and those preceding the 1973 Oil Crisis are uncanny. Meanwhile, Egyptian troops moved into the Sinai Peninsula, and Syrian troops moved into the Golan Heights – two areas captured by Israel during the 1967 Six-Day War – on the holiest day of the Jewish religion, Yom Kippur. This was the same method of multi-targeted attack and religious day as the Hamas attack of October 7 was used 50 years later by Hamas on targets throughout Israel. The 1973 invasion of Israel by two major Arab nations drew other Muslim countries into the region as the conflict became one of religious rather than simply regaining lost territory. Military and other support came to Egypt and Syria from Saudi Arabia, Morocco, Algeria, Jordan, Iraq, Libya, Kuwait, Tunisia before the end of the War on October 25, 1973 in the ceasefire arranged by the United Nations. However, the conflict in the broadest sense did not stop there. A ban on oil exports to the United States, the UK, Japan, Canada and the Netherlands was imposed by key OPEC members, especially Saudi Arabia, in response to their provision of weapons, intelligence services and logistical support to Israel during the meeting. War. By the end of the agreement in March 1974, the price of oil had risen by about 267 percent, from about US$3 per barrel (pb) to about US$11 pb. This, in turn, fueled the global economic downturn, especially in the oil-importing Western countries.
At the beginning of the current Israel-Hamas War, Iran called for a similar oil embargo on Israel’s common allies by the Islamic OPEC members. At that time, and until now, this call was not followed, mainly due to pressure from the current major influence in the Middle East – China. Two reasons have so far held sway in Beijing’s willingness to steer Middle Eastern OPEC members away from such legislation. The first is that it will jeopardize its economic recovery which is still struggling after its Covid years as it has been the world’s largest crude oil importer since 2017. In addition, the economy of Western countries remains its main export base, with the US. alone accounted for more than 16 percent of export revenue. According to a top European Union energy security source who spoke exclusively OilPrice.comeconomic damage to China would increase dangerously if the price of Brent oil traded at US$90-95 per barrel for more than a quarter of the year. The second reason is that the US had previously brought pressure to China not to allow the price ban, as the economic and political consequences in Washington of this would be at least as disastrous as it would have been in China, as explained again. in my latest book.
That said, there are other options open to Iran to significantly disrupt the world oil market in the coming weeks. One of the most successful of these was the attack launched on Saudi Arabia’s key oil facilities by the Tehran-backed Houthis based in Yemen. On September 14, 2019, the Houthis launched several missiles against the Abqaiq oil refinery and the Khurais oil field that caused Saudi Arabia’s oil production to be cut in half (much longer than it admitted), which caused the day’s biggest jump in the US dollar. since 1988. That said, China has also been a key factor in reducing the threat of this election since then, through its efforts to ensure the smooth passage of its wide-ranging ‘Belt and Road Initiative’ in the Middle East. This has culminated in a rift between the two regional rivals in a historic resumption of relations agreement that saw the two major Muslim powers (Sunni Saudi Arabia and Shia Iran) reestablish diplomatic ties and reopen their embassies in each other’s countries. The Houthis could be used by Iran to dramatically increase the level of attacks in and around the Red Sea for some time, although the impact of the group’s recent efforts to disrupt shipping through this important regional oil transit area has not been as great as Iran would have liked. This has been partly due to the avoidance of the area by many major oil companies and partly to increased security in the region’s waters by the US and its allies late last year.
However, the cumulative effect of such a tandem increase and blockade of another key transport route in the region – the Strait of Hormuz – could have a significant impact on oil prices. The strait controlled by Iran provides the only sea access from the Persian Gulf to the open sea and as such has historically seen at least a third of the world’s crude oil supply pass through it. Only Saudi Arabia and the United Arab Emirates (UAE) have operational pipelines that can cross the Strait, although Iran’s Goreh-Jask pipeline could also cross it in the event of a supply disruption, as analyzed in my recent book. The extreme narrowness of the Strait means that it is easy for tankers carrying it to be attacked by other ships in the water or on the coast and Iran has threatened in the past to cut off the supply of oil in the Strait for several reasons, the most notable being the collection of sanctions.
Nevertheless, as it was seen in various stages after the Russian invasion of Ukraine, the West has specific measures to fill the supply gaps in the oil market in the event of such actions, although they may not last for more than a few months. . The US Strategic Petroleum Reserve (SPR) currently contains approximately 383 million barrels of oil, and this may be used for global oil spills, as is the case after February 24, 2022. The member countries of the International Energy Agency (IEA) have. The current accumulated strategic oil reserves are about 1.2 billion barrels, which may also be dropped around the world as early as 2022. The goal of the IEA is that member countries hold at least 90 days of oil imports and that these are actually ready for use in an emergency. This definition of spare capacity cannot be applied generally to Saudi Arabia’s claims of excess capacity, as well explained in my recent book, but there may be real capacity left in OPEC as a whole, mainly due to ongoing production cuts. The latest industry estimates are that this total OPEC spare capacity may be around 3-4 million barrels per day.
If there is a significant decline in any of these other supply channels, an indication of what could happen to oil prices was drawn up at the beginning of the Israel-Hamas conflict by the World Bank. It said a ‘minor disruption’ – where global oil supplies are cut by 500,000 to 2 million bpd (roughly the same as the drop seen during the Libyan civil war in 2011) – would see oil prices initially rise by 3-13 percent. . A ‘moderate disruption’ – involving a loss of 3 to 5 million bpd (roughly the same as the 2003 Iraq war) would increase oil prices by 21-35 percent. And a ‘major disruption’ – including a drop in supply of 6 to 8 million bpd (like the drop seen in the 1973 Oil Crisis) – would increase the price of oil by 56-75 percent.
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