The oil and gas market has not yet recovered from the consequences of the Russian invasion of Ukraine and is already facing further threats from the escalation of the Palestinian-Israeli conflict in the Middle East. The Hamas attack on Israel in October triggered a wave of violence, with global markets watching anxiously to see what impact the instability in the region would have on energy supplies and prices. The Middle East holds up to 48% of the world’s oil reserves and 40% of the gas reserves, while 31% of global oil production and 18% of natural gas are produced here. At the same time, the countries of the Middle East are among the leading exporters of these energy commodities.
Although neither Gaza nor Israel are significant oil and gas producers, there are legitimate concerns that the conflict will lead to broader economic instability. The war in the Middle East has already impacted Western countries’ economic markets. The natural consequence of conflict is lower trade with the Middle East. Still, the most significant and influential way in which conflict can spill over into the economies of Western countries is in the market for energy commodities. Two days after the start of the Hamas attack, Brent crude oil prices rose 4.2 per cent to $88.15, while on the US market, West Texas Intermediate (WTI) was up 4.3 per cent to $86.38 per barrel but still far from the historical high. The International Energy Agency (IEA) said market prices are now stable. The IEA clarified that the increase in prices was not due to the immediate impact of the conflict but to concerns about possible supply disruptions. The Israeli-Palestinian war has thus far had no direct effect on oil flows.
The response of the Organisation of the Petroleum Exporting Countries (OPEC), which plays a key role in the oil market, may still influence the situation. Particularly important will be the position of Iran, an OPEC member which has long had hostile relations with Israel. Iran is one of the oil powers in the Middle East and, despite years of international sanctions, has managed to increase its production over the last year and export it to world markets. Iran has made no secret of the fact that it is on the side of Hamas in the Israeli-Palestinian conflict, to which it has long supplied money, weapons and political support. Although its direct involvement in the current war has not yet been proven, any possible expansion of the conflict may be accompanied by tougher Western sanctions on Iranian oil exports.
In response to Western moves, Iran may block the Strait of Hormuz, the world’s most crucial oil hub, which carries up to 17 million barrels of oil per day, about 30% of the oil transported by sea. In such a case, oil prices could jump up very significantly to the level of USD 140 per barrel. However, Saudi Arabia, a member of OPEC, could ease the tense market situation. If necessary, Saudi Arabia can increase its oil production and exports, which would help to stabilise the market situation. Unless the conflict between Israel and Hamas takes on a more regional dimension and affects the main transit routes, both production and oil prices may remain unchanged.
The Israeli-Palestinian conflict has also affected gas supplies. Since the attacks began, prices of liquefied natural gas (LNG) have risen by more than 40%. Some North Asian countries have even suspended planned purchase agreements that were supposed to provide them with more fuel for the winter. Israel’s energy ministry ordered Chevron to temporarily halt production 25 kilometres northwest of Gaza at a facility primarily used to meet domestic needs. The government in Tehran also ordered the suspension of the East Mediterranean Gas (EMG) pipeline, the most essential pipeline that connects Israel to Egypt.
But again, the impact of the war on the natural gas sector will depend on its length and scope. If the shutdown of LNG production were extended, Israel itself, which uses liquefied gas to generate up to 70% of its electricity, would pay the price. Supplies to Egypt and exports from Egypt to Turkey and several EU countries would also be at risk. It may seem that these are only small supplies. Still, the liquid gas market has faced several other challenges recently, including damage to the Baltic connector and strikes by several Australian power stations, which have weakened the gas market. All these factors have also contributed to the rise in global LNG prices.
If the conflict were to spread to more Arab countries, which does not seem likely today, it could significantly complicate the planned cooperation, which should, in particular, allow the creation of a major regional hub. Israel is planning cooperation with Egypt, Jordan, and Lebanon. As with the oil market, Iran’s potential involvement in the conflict is receiving the most attention in the natural gas sector. Blocking the Strait of Hormuz would pose a considerable security risk to the LNG vessels that pass through the Strait on a daily basis. A permanent restriction on the export of supplies could also cause complications for some EU countries. Italy, for example, relies on supplies from the eastern Mediterranean region to wean itself off Russian gas.However, the impact of the conflict on the energy sector may ultimately be positive. The International Energy Agency (IEA) estimates that the war between Israel and Hamas will accelerate the transition to cleaner energy sources. “In a very short period of time, the world has been hit by geopolitical events that have affected both the availability and prices of oil and gas,” the agency’s executive director said. Referring to the oil crisis of the 1970s, when the world responded to the lack of oil by building nuclear power plants, the IEA expects that even now, when the oil and gas market is exceptionally tight, governments will switch to using clean energy sources.
This brief is supported by
NATO’s Public Diplomacy Division