Donald Trump created history by winning 300 electoral votes, way ahead of the 270 mark needed to win the presidency and became the only second leader to serve non-consecutive tenures. Trump’s presidential win draws new speculations with regard to the ongoing Iran-Israel conflict and the looming risks on the global political economy. In response to the ballistic missile attack, on October 26, Israel launched a targeted attack on an Iranian missile production site that killed one civilian and 4 IRGC soldiers. Following that, the US also stationed the lethal B-52 Stratofortress bombers and F-15 fighter jets in the region. As per Israeli intelligence, Tehran is expected to launch a counter-attack from Iraq in early November.
Earlier, in response to the Iran led missile attack on Tel Aviv, Israel was considering attacking Iranian energy facilities, raising concerns of a wider regional escalation that could threaten global oil supplies. On October 1, Iran launched a barrage of approximately 180 ballistic missiles at Israel. Israel and a defensive coalition led by the US, intercepted many of these missiles, although a few struck central and southern parts of Israel, causing damage to Israeli air bases. Following that, Israel along with the United States reprimanded Iran of a severe retaliation, evoking the possibility of direct attack on Iranian oil facilities.
Background
Since October 7, last year, an armed conflict between Israel and Hamas led Palestinian militant groups has been taking place in the Gaza strip and Israel. Iran’s regional proxies, including the Yemeni Houthis and the Lebanese Hezbollah, have also been exchanging missile attacks with Israel, involving Israel in a multifront battle in the region. On April 1, Israel allegedly attacked the Iranian consulate building in Syria’s capital, Damascus, killing 13 people, including seven members of Iran’s Islamic Revolutionary Guard Corps (IRGC).
In response to the attack on its Syrian consulate, in April, Iran launched Operation True Promise, a massive aerial attack on Israel, involving more than 120 ballistic missiles, 30 cruise missiles and over 170 drones. The US also intercepted dozens of missiles and drones aimed at Israel from its bases in Syria, Iraq, Jordan and Yemen. Later that month, the Israeli Air Force launched airstrikes targeting an S-300 long range air defense facility in Isfahan, central Iran. It was a limited and targeted airstrike by Israel, causing no extensive damage to the Iranian air base.
In July, Israel assassinated Ismail Haniyeh, Hamas’ political leader in Tehran, where he was attending the inauguration ceremony of newly elected Iranian President, Masoud Pezeshkian. In September, Israel initiated a ground invasion into Lebanon, named Operation Northern Arrows, as part of the ongoing Israel-Hezbollah conflict. On September 27, Israeli aircrafts attacked residential buildings in the Haret Hreik area of southern Beirut, using bunker buster bombs to kill Hassan Nasrallah, secretary general of Hezbollah. Abbas Nilforushan, a senior IRGC general also got killed in the Israeli attack.
On October 1, Iran’s IRGC attacked Israel with 180 Fatah hypersonic missiles, targeting Israel’s Nevatim, Hatzerim and Tel Nof air bases. Israel along with the US and Jordan intercepted most of the missiles but a few hit Israeli ground, causing infrastructural damages to Israel. The Iran led attack, named Operation True Promise II, which as per to the IRGC officials was carried out in response to the killing of Ismail Haniyeh, Hasan Nasrallah and Nilforushan, marked the largest attack during the ongoing Iran-Israel conflict.
Looming Risk on Iranian Oil Facilities
Israel has been engaged in a multifront battle against Iran’s regional proxies in Gaza, Lebanon, Yemen and Syria; a direct attack on Iranian oil facilities raises the potential of a wider regional escalation that could threaten global oil supplies. Earlier, as Israel has been discussing with the US to strike Iran’s oil and gas industry, the Gulf states, which have been uninvolved in the conflict so far, were seen lobbying the US to pressurize Israel for restraint.
Israel’s direct attack on Iran’s oil facilities and consequent disruption of the flow of 1.7mn barrels per day of Iranian oil exports will have serious consequences for global energy markets. An uncontrolled cycle of attacks between Iran and Israel would lead to an oil price surge, reigniting inflation and impacting the global economy.
The Kharg Island export facility, about 25 km off Iran’s southern coast, is Iran’s most important energy infrastructure which handles 90 per cent of crude shipments. In the 1980, during the Iran-Iraq war, Iraq threatened to demolish the Kharg facility and targeted Iranian tankers departing from the terminal. Iran’s Abadan refinery, accounting for 17 percent of Iran’s gasoline refinery capacity, Mahshahr oil terminal and major pipelines and storage facilities near Hormozgan could be other potential targets.
An attack on Kharg would lead to massive and prolonged loss of about 1.5mn barrels per day or about 1.4 per cent of global consumption, although Israeli attacks on Iran’s minor oil infrastructure could result in temporary loss of output 450,000 barrels per day. Israel hitting Iranian export terminals or oil fields might have lesser impact on oil prices since Iran would still have more crude oil for overseas trade.
Potential Iranian Response
In response to any such attack, Iran and its regional proxies, the Axis of Resistance, could possibly internationalize the conflict by launching attacks on operational facilities owned by the U.S. or its allies in the region, leading to a significant escalation. In 2019, Iranian proxies allegedly attacked Saudi Arabia’s Khurais and Abqaiq oil facilities, which temporarily impacted more than half of Saudi Arabia’s crude oil production. Tehran’s restoration of diplomatic ties with Riyadh, eliminates the latter from any potential attacks. Iran’s regional proxies such as Hezbollah and the Houthis could step up attacks on oil tankers to disrupt oil supply and re-route traffic.
In the Red Sea, the Houthis could continue attacking merchant vessels which they say are in response to Israeli attacks on Gaza. Another less likely response that could impact global supply chains is the choking off traffic through the Strait of Hormuz which is one of the key passages for oil supply with an average of 2,500 commercial vessels passing through the strait each month. Despite a period of high tensions in the region, Iran has never blocked traffic through the Strait of Hormuz as it would affect Iran’s own exports.
Implications for Global Markets
Iran qualifies to be one of the largest oil producers in the OPEC + cartel with 4Mb/d and about 1.3 Mb/d of exports, primarily to China. Israel’s attack on Iran’s energy sector could potentially disrupt global oil supplies. Escalations in the Middle East and China’s reduced oil demands have jolted the oil market, raising the price of Brent crude to nearly $78 per barrel. Continuation of limited airstrikes are unlikely to raise prices above $85, however, hitting energy infrastructures or a successful effort to choke off the strait of Hormuz could certainly push prices up to $100. In 2008, Brent hit its highest recorded price, $147. A potential hike in Brent crude price will ultimately lead to high petrol prices worldwide.
To counter the negative impacts of a potential oil shock, OPEC + countries, primarily Saudi Arabia and the UAE, with two years of production cuts, could facilitate the market with their spare oil supply. Western nations with their significant strategic reserves and China, which has been stockpiling on Iranian oil reserves, could also help in de-intensifying any oil supply disruption. Due to the Houthis sabotaging merchant vessels in the Red Sea, the Bab el-Mandeb strait remains inaccessible for Western LNG trade. Taking the Cape of Good Hope route is resulting in greater disadvantage for the supply chains between the US and LNG importers in northeast Asia.
The ongoing conflict is also resulting in the disruption of international flight paths. The new flight paths, longer than those that went through Iran’s airspace, are translating into higher fuel burn and higher operating costs for airlines. There is a risk of sudden flight cancellations as countries may restrict their air spaces due to ongoing military operations. The region also witnesses a reduced availability of commercial flights as travel paths are disrupted.
Furthermore,the escalation of conflict is expected to result in high logistics costs as well as the insurance costs for exports to countries directly involved in the conflict. Affecting trade routes like the Strait of Hormuz and attacking merchant vessels in the Red Sea could disrupt transportation and logistics, leading to higher shipping costs and supply delays.
Diplomatic efforts are underway, yet the risk of further military confrontation between the two countries remains high, rising concerns of a wider regional conflict and its potential impact on the global economy.
