The strange calm on world oil markets is unlikely to survive the blockade of Gaza, let alone an Israeli land invasion and the total eradication of the Hamas regime.
The only way to knock out Hamas is house-to-house, block-to-block, urban warfare. “This could take several months,” said Alex Plitsas from the Atlantic Council.
It will also put intolerable strain on the international system. As US secretary of state Antony Blinken said in Jerusalem on Thursday: “how Israel does this matters”.
Gaza’s supply of food, water, power, and fuel have already been cut off. Arab street sentiment will harden as the enclave turns into hell on earth and Palestinian deaths climb into the thousands, forcing reluctant governments across the Middle East to line up behind the fraternal cause, whatever their geopolitical quarrels with Hamas and Iran’s Axis of Resistance.
The grand bargain between the US, Israel and Saudi Arabia is already a dead letter. This has large implications for oil at a time when the crude market is already in deficit and prices are at the upper band of their historical range – pushed higher by Saudi and OPEC production cuts of two million barrels a day (b/d), otherwise known as cartel price manipulation.
The unspoken terms of the deal were that Saudi Aramco would feed back one million b/d as a unilateral gesture. But this depended on Israel beefing up the Palestinian Authority on the West Bank, one reason why Hamas was so determined to thwart it. The accord is now almost unthinkable.
One can only assume that Hamas intended to provoke total conflagration by decapitating women and children in the worst massacre of Jews since the Holocaust. Events must now follow their Sophoclean script with a haunting inevitability.
There must be a high risk that the unstoppable chain of events will trigger an assault by the Lebanese Hezbollah, backed by Iran and armed with 150,000 missiles on the northern Blue Line, in turn spreading to Syria. Israel bombed Damascus and Aleppo airports in a preemptive strike on Thursday. “The longer the war, the greater the probability that Hezbollah joins in,” said Dr Walid Abdel Hay, a Jordanian political analyst.
Everybody knows the stakes by now: we are one escalation away from a showdown between Iran and the Western democracies, which are broadly standing behind Israel, as they must after the savagery of the Hamas attack.
What began last year as a Russian 10-day special operation in Ukraine is morphing into a shadow world war on three fronts, with the West facing an unholy alliance of Russia, China, and Iran, all operating with some degree of collusion.
There is a disturbing amount of political chatter in Iran that a) the US is now so bogged down with Ukraine and Taiwan that it cannot step up to the plate in the Middle East, and b) that Europe is facing such a cost of living crisis that it is effectively crippled. This sort of thinking is how calamitous miscalculations occur.
While Beijing calls for “restraint” on all sides in the Levant, the state-controlled media entirely skips over the character of the Hamas attack. It blames the US, just as it parrots Kremlin propaganda on the war in Ukraine.
The league of autocracies is growing bolder as the West depletes its ammunition stocks and starts to fray along multiple lines of cleavage. The suspected Russian sabotage of the Finnish-Estonian gas pipeline this week crosses into Nato territory. The fight is being taken to us.
This clash of political civilisations is happening at a time when G7 sovereign debt ratios are already at or near record levels, with fiscal deficits on an untenable trajectory. We require wholesale military rearmament – 3pc to 4pc of GDP – but our democracies are not remotely ready for what this may mean.
President Joe Biden has until now turned a blind eye to an extra 700,000 b/d of Iranian crude finding its way around the sanctions and onto global oil markets. Uproar in Congress will put a stop to this.
All can now see that it has been funding the foreign adventurism of the Islamic Revolutionary Guard Corps. The Stop Harbouring Iranian Petroleum Act aims to sanction any bank, insurer, or ship, anywhere in the world, engaged in the illicit transport of Iranian crude. Few will dare to defy the long arm of the US Treasury.
Needless to say, no battle plan survives first contact with the enemy. Iran might retaliate by attacking flows through the Strait of Hormuz, the choke point for 17pc of the world’s crude supply and for Britain’s LNG gas from Qatar. There is also talk in Iran of reactivating Houthi allies in Yemen to attack tankers in the Red Sea.
The coming fall in Iranian supply will collide with an oil market that is already tight. The US strategic petroleum reserve is at a 40-year low. Mr Biden can no longer keep draining it at a pace of one million b/d – to win elections and keep drivers happy – without hollowing out the final emergency buffer.
The Chinese have been doing the opposite, adding 500,000 b/d to their strategic reserve for several months. This has fed speculation of stockpiling before an attack on Taiwan. One might equally ask whether Xi Jinping had wind of something else.
Should we fear a repeat of the Arab oil embargo of 1973 if a Carthaginian solution in Gaza is pursued? Not as such. The oil intensity of global GDP has dropped by 60pc over the last half century thanks to energy efficiency. It is down by more than 70pc in Europe. Most OECD states now hold 90 days of minimum reserves.
The Gulf states no longer have the stranglehold of the 1970s. The US is today the world’s largest producer of oil, due to the technological marvels of shale drilling. The Permian Basin alone produces almost 6m b/d, vaulting past Saudi Arabia’s Ghawar oil field. The US energy department expects American output to reach an all-time high of 13.4m b/d next year.
Nevertheless, ponder what might happen in a serious oil crisis. Some in Congress would push for controls on US crude exports, leaving Europe in the lurch, just as they pushed for controls on LNG exports last year. Wiser heads in both parties prevailed. That cannot be guaranteed in a world of $200 oil.
The market consensus is that an Arab oil embargo is today out of the question. Such action would supposedly undermine OPEC’s long-term future via three effects: it would accelerate energy efficiency, set off fresh waves of investment in shale fracking, and speed up the green transition.
I do not find this entirely compelling. Whatever OPEC says – it still forecasts booming oil demand through the 2030s – it is in fact maximising short-term revenues by trying to push prices to $100. It is already behaving as if it knows that Chinese car sales will be largely electric by 2025, and therefore that the long game is up.
The Gulf states clearly have no wish to quarrel with the West. Most (bar Qatar) loathe Hamas and would be quietly delighted to see Israel annihilate every last cadre. But these monarchies survive on the sufferance of public opinion. Emotions are running so high – and will run higher – that they may be forced into radical action to avert a revolutionary Gulf Spring at home.
The lesson for Europe, if we need another, is that the sooner we replace imported oil and gas from dangerous places with cheaper home-grown energy, the safer we will be.