The Israel-Hamas war has raised concerns about potential disruptions to the global oil market. Iran may retaliate through oil embargoes or attacks on key oil facilities, which could severely impact global oil supplies and prices. China’s influence has so far prevented a full-scale oil embargo, as it prioritizes its economic recovery and stable relations with the West.
A senior European Union energy security source revealed that China’s economic damage would increase if Brent oil prices exceeded $90-95 per barrel for over a quarter of a year. There are other options open to Iran to disrupt the world’s oil market. Attacks on key Saudi Arabian oil facilities by the Tehran-backed Houthis in Yemen have proven effective in the past.
On September 14, 2019, the Houthis launched missiles at Saudi Arabia’s Abqaiq oil processing facility and Khurais oil field, halving the Kingdom’s oil production and prompting a significant spike in oil prices. China has played a key role in mitigating the threat of such attacks, ensuring a smooth route for its ‘Belt and Road Initiative’ across the Middle East. This culminated in a rapprochement between Saudi Arabia and Iran, highlighted by the re-establishment of diplomatic relations.
The Houthis could escalate attacks in the Red Sea, but the increased U.S. and allied security in the region has mitigated some of the risks.
Oil market disruptions amid geopolitical tensions
A more drastic measure would be a blockade of the Strait of Hormuz, the lone sea passage from the Persian Gulf to the ocean, through which a third of the world’s crude oil supplies transit.
Only Saudi Arabia and the United Arab Emirates have pipelines that can bypass the Strait. Such an act could significantly impact global oil prices, posing a major concern for the global economy. The parallels between the current events in the Middle East and those preceding the 1973 Oil Crisis are striking.
Back then, Egyptian and Syrian forces launched surprise attacks on Israel, which led to broader regional conflict involving many Islamic countries. The conflict resulted in an oil embargo by key OPEC members against the U.S. and its allies, leading to a dramatic spike in oil prices and a global economic slowdown. Early in the current Israel-Hamas War, Iran called for a similar embargo from Islamic OPEC members supporting Israel’s allies.
This call has not been heeded, mainly due to pressure from China. The possibility of Iran resorting to operations directly targeting the global oil sector poses a threat of chaos similar to the 1973/74 Oil Crisis. As seen with the Russia-Ukraine War, oil plays a crucial role in conflicts involving major oil exporters and importers.
