The tensions in the Middle East, marked by the ongoing escalation between Iran and Israel, have deepened the uncertainty pervading the markets, a trend that has extended since the aftershocks of the COVID-19 pandemic and the Russian-Ukrainian war that began on February 24, 2022. Oil markets respond directly to these geopolitical developments amid grim scenarios that loom over the oil scene should the circle of tension widen and the conflict threaten regional and global security and stability. Consequently, oil prices rose for the third consecutive day after Iran launched approximately 200 ballistic missiles at Israel, prompting Prime Minister Benjamin Netanyahu to vow retaliation, thus increasing risks to oil supplies from the region and to oil facilities in Iran.
The date of October 7, 2023, may be considered a critical moment in the context of the geopolitical tensions that have marked the world since the onset of the Russian-Ukrainian war. This is particularly true as events unfold in the Middle East and concerns grow over the prolongation of this conflict and its potential expansion by the involvement of additional parties (various scenarios), leading to multiple risks that could threaten global energy markets (a real wake-up call for global energy security).
As a result, many nations are striving with all their might to save energy markets from slipping into a severe supply crisis that threatens their peoples with hardships. This struggle comes after they have been besieged by additional factors over the past period, which have left them weary. The energy sector has witnessed several events that may alter the global energy equation and the landscape of crude oil and gas, occurring alongside many economic crises.
Current Oil Price Range
Oil prices saw a notable surge as geopolitical tensions intensified in the region, achieving gains of approximately 8% from the lowest levels recorded during the past period. This current surge is driven by two main factors: Iranian oil and increased shipping costs, exerting additional pressure on global markets. Overall, oil prices rose by about 8% by the close of trading on Friday, October 4, 2024, reaching around $78 per barrel amid fears of supply disruptions. These concerns indicate a limited rise, not solely due to supply and demand but also because oil production and supplies have not been disrupted thus far. This is occurring against a backdrop of rising unrest in the Middle East following Iran’s limited military strike on Israel. There are fears that the escalating tensions in the region could impact production from key exporting areas, thus clouding expectations for weak global demand growth.
It is noteworthy that oil prices ended trading on September 30, 2024, registering monthly losses for the third consecutive time and closing the third quarter with significant losses exceeding 15%. This bearish trend has now shifted to an upward trajectory as a direct consequence of the limited Iranian strike.
The recent wave of assassinations has become a pivotal factor in predicting oil prices in the near term, with markets closely monitoring the state of tensions that could threaten the world’s largest crude oil production regions. The Middle East holds more than 58% of the world’s crude oil resources; although the region only produces around 9.6% of the world’s natural gas, it possesses approximately 37% of the world’s confirmed crude oil reserves.
The Middle East has paramount importance in the calculations of major powers due to its strategic significance in the regional political landscape and its abundance of natural resources, particularly crude oil and natural gas.
Current Economic Impacts
The recent tensions in the Middle East and the implications of the Gaza conflict have heightened geopolitical risks in global markets, with investors closely watching for potential fallout from Iran’s direct involvement in the conflict. This participation could further elevate oil prices and deliver a new blow to the global economy. There are several implications for markets overall, including:
First: Rising Energy Prices
The war on Gaza has resulted in a slight increase in oil prices, with ongoing fears that markets may surpass the $85 per barrel mark, significantly impacting countries that rely heavily on crude oil as a primary input in their industries. This situation has raised inflation fears, as higher energy costs spread across various economic sectors.
Second: Energy Supply Threat
Alongside concerns of price rises, there is a genuine threat of energy shortages if the conflict continues and affects energy production in key areas. Transport routes for energy resources have been disrupted, significantly impacting global oil and gas supplies and exerting clear pressure on price movements, particularly through the Strait of Hormuz.
Third: Impact on the Middle East
While the anticipated rise in crude oil and natural gas prices may benefit oil-producing and exporting countries in the region by increasing their revenues and reducing deficits, it also comes with a set of challenges during crises. Ongoing conflicts cause inflation, notably in transportation costs, and create an unfavorable environment for oil investments.
Current Price Range
Since the beginning of the current year, global oil markets have experienced instability, with recent developments in the Middle East reflecting a new trajectory for oil prices and global oil markets. Over the past few years, global oil prices have seen significant fluctuations, particularly since the start of the Russian-Ukrainian war. The tensions in the Middle East have contributed to uncertainty in the global crude oil market and severe volatility in price movements, generally hovering around the $80-$85 per barrel level.
The energy sector serves as an indicator of the exorbitant costs that the region will face should a broader conflict erupt, with some repercussions already measurable in certain countries within the area.
Energy Sector Status for Direct Conflict Parties (Iran and Israel):
Generally, Israel has consumed about 215,000 barrels of oil daily in recent years, with Turkey being the primary source of its crude oil shipments, which come via pipelines from Azerbaijan and Iraq, particularly from the Kurdish region of Iraq. Other significant suppliers include Nigeria, Gabon, Kazakhstan, and Brazil.
Israel relies heavily on imported crude oil for its refinery sector, which has a capacity of about 300,000 barrels per day, with substantial local demand of around 250,000 barrels daily. Israel also exports relatively small shipments of refined oil products such as gasoline and diesel.
Given that most of Israel’s imports arrive by sea from the Mediterranean and Black Seas, a protracted war could compel more tankers to take an elongated route through the Suez Canal to Eilat instead of Ashkelon, thereby adding approximately four days to the journey and increasing shipping costs. Notably, Israel held approximately 10.72 million barrels of crude oil (strategic reserves) in its inventory as of 2023, which helped it navigate the crisis at that time, although future threats to energy supplies persist if the current conflict escalates.
In summary, crude oil prices are reacting to geopolitical tensions—fluctuating amid fears of further escalation, with oil prices serving as an important economic indicator. Oil is the most utilized resource globally, with numerous wars having erupted over it. Consequently, market players are closely watching crude oil prices, especially since the outset of the Russian-Ukrainian war.
Iran’s Oil Standing
Iran’s energy sector comprises not only oil but also natural gas and electricity, in addition to new projects aimed at developing renewable energy sources. However, there are threats looming over this vital sector in light of the current tensions with Israel.
Iran holds substantial oil reserves worldwide (with a population of approximately 83 million), ranking among the top producers of oil globally. It is third among OPEC nations in terms of confirmed oil reserves, owning around 14%. Most of Iran’s oil reserves are onshore, making up about 71%, while the Khuzestan basin contains around 80% of Iran’s total oil reserves. The estimated total recoverable oil reserves in Iran, occupying the 17th position globally regarding an area of about 1.6 million square kilometers, stand at approximately 157.8 billion barrels as of the end of 2023.
Iran owns around 145 oil fields (both onshore and offshore), primarily located in the south and west of the country. The Ahvaz field is the largest in the region, in addition to approximately 21 gas refineries and 10 oil refineries, while it possesses the technical capabilities to build additional refineries.
Overall, Iranian oil production has increased since the start of the year, surpassing approximately 700,000 barrels per day, reaching its highest levels in five years at about 3.25 million barrels daily—an increase attributed to reduced tensions with Washington prior to the current direct confrontation with Israel. The leniency of the U.S. administration regarding Iranian oil exports has been linked to a desire to contain the rise in crude prices (soon after late 2022).
Generally, there is a noticeable discrepancy between the various data available on Tehran’s oil exports, with estimates ranging from 300,000 barrels to over one million barrels daily. Kepler data, a shipping flow data provider, indicated that Iranian crude oil exports exceeded 1.5 million barrels daily in December 2023, representing the highest monthly output since 2018.
Date | Estimated Exports (Million BPD) | Source |
---|---|---|
2018 | 2.60 | Pre-sanctions data |
2019 | 0.33 | After US sanctions |
2020 | 0.50 | Various estimates |
2021 | 0.90 | Various estimates |
2022 | 0.90 | Various estimates |
Jul 2023 | 1.40 | Various estimates |
Sep 2023 | 1.50 | Washington Institute |
Year average 2023 | 1.40 | Average from estimates |
Dec 2023 | 1.50 | Kpler |
Tehran is grappling with the effects of U.S. sanctions imposed since 2018 following Washington’s unilateral withdrawal from the nuclear deal with Iran. These sanctions have deprived Tehran of around $100 billion in crude oil revenues, preventing it from exporting approximately 1.8 billion barrels of oil between April 2018 and April 2021.
Period | Oil Exports (Million BPD) | Estimated Revenue (Billion USD) |
---|---|---|
2018 | 2.60 (Pre-sanctions) | 53.0 |
2019 | 0.33 (Post-sanctions) | 22.1 |
2020 | 0.78 (Average) | 12.7 |
2021 | 1.20 | 30.0 |
It is important to note that Tehran utilizes three primary methods to smuggle and export its oil to external markets, suggesting that U.S. sanctions may be more of a formal tool than an effective deterrent:
- The First Method: Involves transporting Iranian oil via small Arab vessels to the entrance of the Shatt al-Arab waterway in the Arabian Gulf, where it is transferred to larger tankers and sold as non-Iranian oil.
- The Second Method: Involves shipping Iranian oil on Iranian vessels to Syria, and possibly Lebanon, where it is stored until clients can be secured, typically oil brokers outside the purview of major importers, often referred to as the gray market.
- The Third Method: Involves shipping Iranian oil in large tankers and floating them in the seas until clients are found, or storing their cargoes at the Chinese port of Dalian. Currently, Tehran owns over 40 giant oil tankers operating in this manner.
Overall, Iran’s confirmed natural gas reserves were approximately 1.2 trillion cubic feet in January 2024, ranking it second globally and giving it about 17% of the world’s confirmed natural gas reserves, nearly half of OPEC’s reserves. In 2022, Iran ranked as the third-largest producer of dry natural gas globally, following the United States and Russia, and despite the sanctions that limit investments and hinder natural gas development in Iran, the production of dry natural gas increased by over 60% between 2011 and 2023, expanding to nearly 8.8 trillion cubic feet.
In 2023, Iran was the fourth-largest consumer of natural gas globally, following the United States, Russia, and China. Most of Iran’s natural gas production is used domestically (Iran produces about 1 billion and 40 million cubic meters of gas, delivering around 980 million cubic meters to the National Gas Company).
Iran possesses one of the largest refining sectors in the Middle East, with a production capacity of approximately 2.4 million barrels per day in 2024, distributed across 10 major sites. Its three largest refineries are: Isfahan Refinery, producing around 370,000 barrels daily; Abadan Refinery, yielding approximately 360,000 barrels daily; and Bandar Abbas Refinery, outputting around 320,000 barrels daily, and the Najm al-Khalij plant, also in Bandar Abbas, producing about 399,000 barrels daily. Najm al-Khalij, commissioned in 2018, is Iran’s newest and most crucial local gasoline source, meeting about 40% of domestic demand last year in 2023. The National Iranian Oil Refining and Distribution Company, a state-owned entity, maintains complete control over the transportation, storage, marketing, and distribution of oil products in Iran. Among the prominent ports from which Iran exports oil are Bandar Abbas and Kharg Island, representing around 90% of Iranian oil exports (which become potential targets for Israeli retaliation).
Iranian oil industry is a fundamental pillar of its economy. Despite years of sanctions imposed by the U.S. and other Western powers, Iran still exports between half to two-thirds of its oil, most of which ends up in China.
Chinese imports of Iranian oil have steadily increased in recent years, reaching about 1.8 million barrels daily. This implies that any disruption to Iranian oil exports would significantly impact Tehran’s economy and harm the Chinese economy (the second-largest economy globally). Consequently, it would adversely affect the global economy as a whole (cutting off Iranian oil supplies would force Chinese refineries to increase purchases from other major suppliers, including Russia. Such a shift could lead to greater financial support for Russia’s war efforts in Ukraine, complicating the broader geopolitical landscape).
Thus, it can be argued that strikes on Iranian oil facilities could cause significant economic damage to Tehran. While Iran’s extensive oil infrastructure, which includes vast oil fields, pipelines, export terminals, and refineries, constitutes an appealing target for Israeli strikes, the repercussions of such actions could backfire on global oil markets. Such strikes could lead to a massive increase in oil prices globally, resulting in widespread economic repercussions.
Scope of the Conflict and Future Impacts
Looking at the current scale of the conflict, it appears that although the current strife in the Middle East poses a direct threat to oil supply lines and key sources in the area (with escalating effects due to associations with major oil-producing countries), generally, oil markets are looking beyond that. There exist considerable fears regarding the potential expansion of the conflict to include additional parties (a direct war instead of limited mutual strikes).
Thus, it can be asserted that the missile attack by Iran on Israel could exacerbate the ongoing conflict between Israel and Hezbollah, as well as with Hamas, significantly increasing the risk to at least some Israeli oil infrastructure, including about 287,000 barrels daily from its refining capacity.
There are multiple potential scenarios for the current conflict in Gaza regarding the future trajectory of oil markets and growth forecasts. However, the greatest threat to the global crude oil industry remains the danger of disruptions to Iranian oil production or exports. Such disruptions could lead to a reduction in global supply, resulting in sustained price hikes, or could provoke Iran to obstruct traffic through the Strait of Hormuz, which handles around 20% of global oil trade. Such moves could result in significant increases in prices—this could translate into rises in fuel prices, a perennial issue in U.S. electoral campaigns, especially with the upcoming presidential election on November 5.
Future Risks
In light of the aforementioned factors, an increase in global oil prices to around $140 per barrel is not far-fetched, particularly if geopolitical risks in the region escalate due to the expansion of Israeli aggression against multiple regional states (escalating military operations and targeted killings). The rising conflict in the Middle East may transition into a direct (ongoing) war between Israel and Iran, rather than an indirect one through Yemen, Iraq, Lebanon, and Syria or limited, sporadic, retaliatory strikes. Additionally, increased Western restrictions on Russian oil (predictions of new sanctions) are likely, coupled with increasing demand from major energy consumers, particularly China.
Overall, there are beneficiaries from this spike in crude oil prices (approximately 5%), as oil currently trades around $74.8 per barrel. Among the primary beneficiaries are major crude oil-producing countries such as Saudi Arabia, the UAE, Russia, the United States, Canada, and Iraq. The surge implies a flow of billions of dollars into the treasuries and public budgets of these nations, bolstering their financial positions, foreign reserves, and sovereign wealth funds. However, there are severe risks associated with the anticipated oil price surge, both for the global economy, which has not yet overcome the crises affecting it since 2020, and for energy-consuming countries. But the most significant impact will be on individuals in energy-consuming nations, who may face spikes in fuel prices for derivatives like gasoline, diesel, gas, and heating oil. The sectors and services linked to these, such as electricity, water, and transportation, will also see price increases. Rising oil prices signify delayed recovery and growth, exacerbating inflation, increasing production costs, leading to fewer job opportunities, and driving up the prices of goods and services, potentially plunging markets into recession.
In conclusion, escalating crude oil prices are likely to prolong recovery and growth, intensifying inflation and elevating production costs. This indicates fewer job opportunities, hikes in most goods and services, and possibly recessionary conditions in markets and industrial sectors, resulting in factory shutdowns, company bankruptcies, and workforce reductions, while state revenues from taxes and other activities decline. Additionally, the rise in fuel prices could alter the dynamics of U.S. elections, inciting voter discontent against the Biden administration if gas and diesel prices surge amid market downturns, ultimately favoring the opposing candidate, Donald Trump.
The stability of the region and oil security are hinged on the forthcoming political and geostrategic developments. Consequently, these circumstances will certainly impact fluctuations in production, crude oil extraction, and the export processes for these petroleum materials and their by-products.
For the Arab citizen, rising energy prices will lead to new inflationary spikes, affecting all aspects of life. An increase in fuel prices will inevitably raise transportation, communications, housing rents, and living costs even further.
Overall, the upheavals in the Middle East represent one of the greatest geopolitical risks to global oil markets since the Russian-Ukrainian war began. Any war in the Middle East poses a potential threat to oil supply security and energy security broadly. A war that may involve Iran can have even more severe repercussions for the global oil markets, as one assured outcome threatens energy supplies: price increases. Thus, since the onset of the war in Gaza and discussions surrounding global energy security and supplies, all eyes have been on the oil-rich regions of the Middle East and their standing in global energy markets.
Ultimately, there needs to be significant international cooperation to halt warfare and sharp tensions in the region, preventing further economic turmoil, as the ramifications would be catastrophic for everyone involved. Hence, the need for stability, peace, and global cooperation has become an urgent necessity for the world to unite in finding a radical solution to this crisis before the situation explodes and the conflict expands.