The Israel-Hamas war is a multifaceted battle that has significant ramifications for the geopolitical dynamics around oil in the Middle East. Although Israel and Palestine are not major oil producers, there is a possibility of escalation that impacts the overall prospects of the Middle East. This region, responsible for about one-third of the world’s oil production, is now facing increased pressure with this ongoing conflict. Although the conflict has not yet had any direct impact on the global oil supply; nonetheless, there has been a noticeable increase in oil prices.
The Middle East region plays a significant role in the worldwide supply of oil and gas, contributing around 40% of the world’s oil output and 20% of the world’s gas production. The geographical region is also home to several significant oil transportation passages, including the Strait of Hormuz, the Suez Canal, and the Bab el-Mandeb Strait. These passages serve as crucial links connecting the Persian Gulf, the Red Sea, and the Mediterranean Sea.
The conflict between Israel and Hamas, which controls the Gaza Strip, has escalated since October 10, 2023, when Hamas launched a surprise attack on Israel with rockets and drones, killing hundreds of civilians and soldiers. Israel responded with airstrikes and ground operations, targeting Hamas militants and infrastructure in Gaza. The war has also sparked violence and protests in the West Bank, Jerusalem, and other parts of Israel.
Following the incidents, the price of oil increased by about 5% on October 10, 2023, after the outbreak of the war. The average crude oil spot price was $92.22 per barrel on May 31, 2023, which means that it has increased by about $4.61 per barrel since then. Further, the war has raised fears that it could spread to other countries in the region, especially Iran, which is a major supporter of Hamas and an adversary of Israel. Iran has denied any involvement in the attack, but Israel and the US have accused it of providing weapons and funding to Hamas.
The recent jump in oil prices reflects concerns about the conflict becoming a wider conflagration, which could involve Middle Eastern regional players becoming involved through their proxy agents. If Iran were to become involved in the crisis, oil prices may increase by $5 to $10 per barrel. Meanwhile, there is increased uncertainty around a bid by BP and the United Arab Emirates government-owned Adnoc to buy a 50% stake in Israel’s main upstream firm, NewMed Energy. The potential for extended warfare—and targeting of offshore assets—could make foreign investors, particularly in Arab states, more circumspect about Israeli ventures, including Israel’s latest offshore oil and gas bid round.
The price of oil has increased during the Hamas-Israel war because of several factors. The war has created uncertainty and risk in the global oil market, as it could disrupt the supply and transport of oil and gas from the Middle East, which is a major source of energy for the world. Moreover, the war could have also increased the demand and price of oil and gas as a result of the increased consumption of fuel by both sides for their military operations. For example, Israel has used airstrikes and ground operations to target Hamas militants and infrastructure in Gaza, while Hamas has launched rockets and drones at Israel. These activities require a lot of fuel and energy, which could drive up the demand and price of oil and gas. In addition, the war has also affected the production and investment decisions of oil and gas companies operating in the region. For example, some oil fields in Israel have been shut down or reduced their output due to the threat of rocket attacks from Gaza.
This war could have significant consequences for OPEC nations, which are already facing various uncertainties in the global oil market. This war could affect oil production as they may face security risks, logistical challenges, or political pressures from other countries. OPEC members, such as Iraq and Kuwait, share borders with Iran. Also, Saudi Arabia and the UAE have diplomatic ties with Israel and may face criticism or backlash from other Arab or Muslim countries if they continue to supply oil to Israel or its allies. Moreover, it could affect their oil prices and revenues, as they may have to adjust their production quotas or strategies to balance the market and ensure stability.
From a regional standpoint, the oil play has positioned Saudi Arabia as a central player in geopolitical power struggles within the region. The war adds another complicated dimension to global crude trading after prices surged in the third quarter as OPEC+ choked off supplies to tighten the market, then gave up some gains as demand concerns flared up. Also, Saudi Arabia and the UAE have significant spare capacity to curb prices if they choose to do so. They may decide to increase or decrease their output depending on the demand and supply situation in the global oil market. Some OPEC members, such as Iran and Venezuela, are under US sanctions that limit their oil exports and revenues. They may seek to increase their market share or influence by using oil as a political tool or weapon. This war could affect OPEC’s oil policies and cooperation, as they may have to deal with internal divisions or external pressures from other countries or organizations. For example, some OPEC members, such as Saudi Arabia and Iran, have rivalries or conflicts that could affect their coordination or consensus within the group.
From a geopolitical lens, the war could affect the global oil market in several ways. This could disrupt the supply and transport of oil and gas from the Middle East if the conflict escalates or involves other countries. Also, Iran could threaten to block or attack the Strait of Hormuz, which is a narrow waterway that carries about 20% of global oil trade. Further, it could increase the demand and price of oil and gas as a result of uncertainty and risk premiums. For example, Brent crude oil prices rose by nearly 5% on October 10, 2023, after the outbreak of the war. In addition, it could affect the production and investment decisions of oil and gas companies operating in the region.
In conclusion, the Israel-Hamas war is a serious threat to regional stability and security, as well as to global oil markets. The outcome of the war will depend on many factors, such as the diplomatic efforts of the international community, the military capabilities and strategies of both sides and the public opinion and reactions of other countries in the region. The war could have significant consequences for the geopolitics of oil in the Middle East, which is already a volatile and complex region.