What Next For Israel, The Middle East, And Oil Prices?

After the 7 October murder of hundreds of Israeli citizens by Iranian proxy terrorist organisation Hamas, the escalation to a full-blown war in the Middle East has never seemed far away.

Following the ramping in recent weeks of attacks between Israel and Iran’s terrorist proxy in Lebanon, Hezbollah, it appears closer still. So, what comes next for Israel, Iran and its proxies, and the Middle East, and what will happen to the oil price?

The immediate danger of escalation comes more from the brewing Israel-Hezbollah conflict than from the ongoing Israel-Hamas War, according to senior energy security sources in the U.S. and European Union (E.U.) exclusively spoken to by OilPrice.com last week. “The usefulness of Hamas to Iran diminished after 7 October attacks [on Israel] and has been further reduced following Israel’s push into Gaza and its removal of several key figures in the organisation [Hamas], so now its primary purpose [for Tehran] is photo-propaganda,” said the E.U. source. “But Hezbollah is still full of possibilities for Iran, and the further Israel takes the fight into Lebanon, the better for Tehran,” he added. As it now stands, the stated thrust of Israel’s strategic intentions against Hezbollah are to return the 60,000 or so Israelis who were evacuated last year from the northern part of Israel that abuts southern Lebanon. As they were moved from the region due to ongoing missile attacks from Hezbollah, this aim can only be achieved with the neutralisation of the Iranian-backed group within a certain distance of these Israeli residents. This will require an ongoing big push over many months at minimum from troops, tanks and other support vehicles on the ground in Lebanon.

Legally, this would accord with the terms of the UN Resolution 1701 that prohibited Hezbollah from operating south of the southernmost stretch of the Litani River that runs 15 to 20 miles north of the Israeli-Lebanon border, but which Hezbollah has broadly disregarded ever since. However, the practical considerations of such a strategy are less clear cut.

Rather like many invading forces have found over the centuries, getting into an area is easy enough – it is what they do once there that can be tricky, and getting out again can be even more difficult. For Israel, this is extremely likely to be the case, despite the high-level battle-proven armed forces it has, supported by the best military hardware and software currently available anywhere. Israel has also considerably improved its chances of making relatively significant land gains in the short term by neutralising several key figures in Hezbollah’s command structure, most notably including Hassan Nasrallah.

In an open battle, there is little doubt Israel would win, but most of the military actions undertaken in Lebanon to begin with will be of the guerilla warfare model in either urban or hilly terrains that are extremely well-known to Hezbollah and well-developed for its fighting requirements. This would include heavily fortified disguised positions, hundreds of secreted ammunition and fuel resupply points, and multiple networks of tunnels. An additional complicating factor is Hezbollah itself, which is of a different military order entirely to Hamas, with around 100,000 fighters in its force, a huge arsenal of weapons including up to 200,000 rockets and missiles, and a key beneficiary of help from Iran. This includes in the training of its fighters and in the supply of short-, intermediate, and long-range unguided ballistic missiles and short-range guided ballistic missiles capable of hitting all of Israel’s major population centres. Its history of warfare against Israel stands out as uniquely successful among its Middle Eastern neighbours, having driven Israeli forces out of Lebanon in 2000 and having fought them again in 2006, that time to a stalemate.

A sustained fully-fledged assault and push by Israel’s military into Lebanon would be highly unlikely to be met with direct official opposition on the ground from Iran or from sustained direct attacks by it on Israel, thinks the U.S. energy security source. “It’s been made clear the extent of retaliation that could be meted out to it if it took certain courses of action,” he said last week. However, there are several other courses of action open to Iran to ramp up the pressure on Israel and its allies in the Middle East, all of which could push the oil price much higher very quickly. One of the most effective would be to reiterate its call for an embargo on oil exports to the allies of Israel by Islamic members of OPEC. Saudi Arabia did exactly the same thing in 1973 for exactly the same reason – a war between Israel and Islam as it also sought to portray it – with devastating results for oil prices, as analysed in full in my latest book on the new global oil market order. Back in 1973, Egyptian military forces moved into the Sinai Peninsula, while Syrian forces moved into the Golan Heights — two territories that had been captured by Israel during the Six-Day War of 1967. By attacking from multiple points on the holiest day of the Jewish faith, Yom Kippur (the same attack method and religious date as the 7 October Hamas attacks used 50 years later) the two Arab countries thought they could take Israel off guard, which they did for a while at least. Crucially, though, around the same time as this, OPEC members – plus Egypt, Syria, and Tunisia – began an embargo on oil exports to the U.S., the U.K., Japan, Canada, and the Netherlands in response to their collective supplying of arms, intelligence resources, and logistical support to Israel during the War. As global supplies of oil fell, the price of oil increased dramatically, exacerbated by incremental cuts to oil production by OPEC members over the period. Gas prices also rose, as historically around 70 percent of them are comprised of the price of oil. By the end of the embargo in March 1974, the price of oil had risen around 267 percent, from about US$3 per barrel (pb) to nearly US$11 pb. This, in turn, stoked the fire of a global economic slowdown, especially felt in the net oil importing countries of the West.

A similar effect on the economies of Israel’s key Western allies could be effected by Iran using another of its Middle Eastern proxies, the Houthis. Broadly speaking, the net impact of the group’s ongoing disruption of shipping through the key regional oil transit chokepoint in and around the Red Sea has not been as great as Iran would no doubt have wished. Partly this has been due in recent months to the avoidance of the area by many major oil companies that decided to use the longer Cape of Good Hope route instead. Partly as well it can be attributed by the ramping up of security in the region’s waters by the U.S. and its allies towards the end of last year in the shape of ‘Operation Prosperity Guardian’. This multilateral naval task force was designed precisely to guard against such future Iranian or Houthi attacks on oil shipping in the Red Sea region. Indeed, IMF PortWatch data shows average daily ship transits via the Red Sea route’s Bab al-Mandab Strait stood at 23 in the week ended 11 August 2024 against 70 on the same day last year. However, a much greater impact could be had if the Houthis launched attacks on major oil fields and/or refineries in any nearby countries, most particularly Saudi Arabia. The last time the Houthis launched major coordinated attacks against the Saudi Arabian mainland — on 14 September 2019 against the Abqaiq oil processing facility and Khurais oil field — Saudi Arabia’s oil production was halved, causing the biggest intra-day jump in U.S. dollar terms since 1988, as also detailed in my latest book.

Exactly what different scales of action might mean for the oil price was delineated by the World Bank shortly after the 7 October Hamas attacks. It stated that a ‘small disruption’ – with the global oil supply being reduced by 500,000 to 2 million bpd (roughly the same as the decrease seen during the Libyan civil war in 2011) – would see the oil price initially rise 3-13 percent. A ‘medium disruption’ – involving a 3 million to 5 million bpd loss of supply (roughly equivalent to the Iraq war in 2003) would drive the oil price up by 21-35 percent. And a ‘large disruption’ – featuring a supply fall of 6 million to 8 million bpd (like the drop seen in the 1973 Oil Crisis) – would push the oil price up 56-75 percent.