INTELBRIEF

October 9, 2024

The Potential Ripple Effect of Israeli Strikes on Iranian Oil and Global Energy Markets

AP Photo/Hasan Jamali

Bottom Line Up Front

  • As the world braces for Israel’s response to the Iranian missile attack last week, concerns have risen over whether Israel will target Iranian oil fields, potentially impacting global oil prices.
  • Depending on Israel’s strategy, the effects may be felt more by global oil markets or the Iranian public.
  • An Israeli attack on Iranian oil facilities may be less of a concern to the global market than Iran’s potential response following such an attack, like the closure of the Strait of Hormuz, a key shipping access point that sees one-fifth of the volume of the world’s total oil consumption transit through each day.
  • A spike in oil prices from Iranian and Israeli attacks on each other’s energy infrastructure may impact the U.S. election, as gasoline prices are typically an important economic indicator for voters.

As the world braces for Israel’s response to the Iranian missile attack last week, concerns have risen over whether Israel will target Iranian oil fields, impacting global oil prices. U.S. President Joe Biden was asked on Thursday whether Israel is potentially planning to hit Iranian oil facilities, to which the president responded, “we’re discussing that.” Biden’s response was much less definitive than when he outright rejected the idea of Israeli attacks on Iranian nuclear facilities. Following Biden’s comment, oil prices shot up, with the price of Brent crude –– the global pricing benchmark –– rising to $80 for the first time since this summer. So far, the conflicts in the Middle East have not appeared to dramatically impact worldwide oil prices, even as the Iranian-backed Houthis have disrupted global shipping in the Red Sea, including attacks on multiple oil tankers.

Iraq-based Kata’ib Hezbollah, also backed by Iran, released a statement on October 3 warning: “If the energy war starts, the world will lose 12 [million barrels per day] of oil. And as Kata’ib Hezbollah said before, either everyone enjoys [the oil] or everyone is deprived.” Iran is currently the ninth largest oil producer in the world, generating approximately 3 percent of the world’s production. However, according to Reuters, Iran only produces around 3.2 million barrels per day of oil. Despite this, it is likely that strikes against Iran’s oil fields will not have a major impact on the global market, as the Organization of the Petroleum Exporting Countries’ (OPEC) members have enough reserved oil to fill in the gaps. This is further substantiated by Andy Critchlow, Global Head of News at S&P Global Commodity Insights, who claimed that “any disruption to Iranian supplies to the international market, I think can probably be made up by OPEC’s spare capacity and its idled oil at the moment.” Still, an attack on energy infrastructure could spook investors and cause ripple effects throughout the market, depending on the extent of the damage.

Depending on Israel’s strategy, several scenarios are possible. Mohsen Paknejad, Iran’s oil minister, arrived at Kharg Island, Iran’s main export terminal, on Sunday amid concern that Israel may focus its attack there. Keith Johnson reported in Foreign Policy that “an all-out strike on Kharg Island, ... would poleax Iran’s ability to earn much-needed revenue from the bulk of its 1.7 million barrels a day in oil exports.” This is where some impacts may be felt outside of Iran, though other OPEC members may be able to step in. However, more targeted strikes on Iranian refining facilities, for example, may have a larger effect on the Iranian public, such as gasoline shortages, rather than on global markets.

Though Iran is a large oil-producing country, sanctions against Iran have limited its market reach. However, this is not the case in China. China is Iran’s largest oil importer, importing 90 percent of Iranian oil exports. This economic relationship has been vital for Iran’s economy, with “the country’s roughly $2 billion a month in oil sales to China represent[ing] at least 5 percent of Iran’s entire economic output,” according to the New York Times. Despite this, China is the largest energy consumer in the world, and Iran’s exports account for only 15 percent of China’s energy imports. Should Israel attack Iranian oil facilities, limiting its ability to export oil to China, it is highly likely China would be able to recoup supply from other producers like Russia, Kuwait, Saudi Arabia, or Angola. Additionally, China has a mix of other energy sources it can rely on such as coal, solar power, and hydropower.

An Israeli attack on Iranian oil facilities may be less of a concern to the global market than the potential response of Iran following such an attack. Experts are stating that the worst-case scenario in Iran’s response to an attack on Iranian energy infrastructure is the closure of the Strait of Hormuz, a key shipping access point, which has already seen major disruption from the Houthis. Twenty percent of global crude exports travels through the strait from countries such as Saudia Arabia, Kuwait, Iraq, and the United Arab Emirates, which are the “holders of spare capacity,” according to Alan Gelder, vice president of refining, chemicals and oil markets at Wood Mackenzie. If this oil is unable to get out, prices of oil could increase by over $100 per barrel, launching a severe energy crisis.

Additionally, there is concern that should Israel strike Iranian oil facilities, Iran may engage in a tit-for-tat attack on Israeli natural gas facilities. Iran’s Islamic Revolutionary Guard Corps (IRGC) deputy commander Ali Fadavi claimed that should Israel strike Iran’s energy facilities, “[it] will target all their energy sources, installations, and all refineries and gas fields.” Israel’s offshore gas fields are critical to its economy, which has already shrunk by approximately 20 percent since the fourth quarter of 2023 due to the conflict in the Middle East.

A spike in oil prices because of Iranian and Israeli attacks on each other's energy infrastructure may also cause a headache for Vice President Kamala Harris’ campaign as the U.S. presidential election approaches. Though the U.S. president does not directly set gasoline prices, it often reflects presidential approval ratings. Any attack damaging energy infrastructure will offer Harris’ opponents talking points to criticize her during the home stretch with less than a month before the election. It is still unclear whether a dramatic price increase will occur in the global market; however, if prices do increase substantially, American voters may consider that when voting in the election. During a White House briefing last Friday, President Biden remarked that Israel ought to be “thinking about other alternatives than striking oilfields,” perhaps to thwart the possibility of rising prices as the election draws closer.

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