As Joe Biden arrived in Israel on Wednesday (18 October) the Organisation of Islamic Cooperation, which represents 57 countries in the Muslim world, held an emergency meeting in the Saudi city of Jeddah. During the meeting, Iran’s foreign minister called for an oil embargo against Israel. Almost 50 years to the day after Opec nations embargoed oil exports to Israel and its supporters, the echoes of the 1973 oil crisis – and the recessions that followed – are getting louder.
The Hamas-Israel conflict has already caused a surge in the price of oil, which has risen beyond $92 per barrel, and the gas market, which has reached an eight-month high. It has had a similar – but so far much less pronounced – effect on energy markets to Russia’s invasion of Ukraine last year, which caused oil to immediately rise to more than $100 a barrel and wholesale gas prices to peak at ten times their typical levels.
The Russian energy spike was a huge blow to the UK economy. The government was forced to provide more than £78bn in support to households and businesses; companies and consumers struggled anyway, as inflation reached more than 11 per cent. Prices are still rising at more than three times faster than the Bank of England’s target rate, and last month the consumer price index held at 6.7 per cent, largely due to the rising cost of fuel. The price of energy soon becomes the price of everything else.
Henning Gloystein, director of energy, climate and resources at the political risk consultancy Eurasia Group, said the 2022 energy crisis cost Europe and the UK in the region of a trillion dollars. “There’s only so many conflicts you can cope with, in global supply chains, when these conflicts are in areas of significance for raw material supply, like oil and gas,” he told me. “It doesn’t take much to get back to where we were a year ago.”
The price of oil can be pushed up by good economic news (more work and more spending require more energy) or bad geopolitical news (new risks may increase the cost of production and trade). At the beginning of October, oil prices had been falling in response to a slowing global economy and a Middle East region that was, as Biden’s national security adviser Jake Sullivan told a conference a week before the attack, “quieter today than it has been in two decades”.
The Opec+ cartel, a group of major oil-producing nations, had been trying to support oil prices with production cuts, but the downward trend remained, and indeed resumed in the days immediately following the Hamas attack. That changed when, despite the best efforts of US diplomats, Iran became more vocal in its condemnation of the Israeli response. On Sunday (15 October), Iran’s mission to the UN released a statement describing Israel’s bombing of Gaza as “war crimes and genocide” that could cause the situation to “spiral out of control”.
[See also: Russia and China still need each other]
Iran is technically under sanctions, but its oil exports have been allowed to continue without much enforcement; in July, exports reached 1.6 million barrels per day, and in September, Iran was allowed to recoup $6bn in frozen funds. A greater flow of Iranian oil helped prevent prices rising still higher in 2022.
Gloystein said the market has yet to price in enforced sanctions on Iran. “The current market conditions don’t reflect an escalating conflict,” he told me. Direct Iranian involvement in the conflict, Gloystein said, would almost certainly push oil above $100 a barrel once more, but the rise we have seen so far only reflects the reintroduction of the “risk premium” that accompanies less stable geopolitics. John Kemp, senior commodities and energy analyst at Reuters, agreed that it is important not to catastrophise: the oil market, he said, “is assigning a very, very low probability to any direct link with Iran being proved”.
Major oil producers do not want to push other countries into recession; they depend for their cash flow on the energy needs of Western economies. Robin Brooks, chief economist at the Institute of International Finance, explained that many of these countries are engaged in the very expensive business of trying to diversify their economies away from oil. Despite their huge wealth, he told me, “their spending needs are actually quite large. You would think that they don’t need to worry about revenue – but they clearly do.”
Gas prices are a more immediate concern for the UK economy: most British homes are heated by gas, and it generates more than half of our electricity. Around half of the gas we burn is imported, and as a significant producer of natural gas, Israel can move the wholesale market. Two days after the Hamas attack, Israel ordered Chevron to shut down the Tamar gas field, about 50 miles off its coast, for security reasons. The Tamar field had an output of more than ten billion cubic metres in 2022. For scale, the Rosebank field, the UK’s largest untapped deposit of oil and gas, is not expected to produce more than one billion cubic metres a year when it reaches peak production in 2031.
Much of the Tamar gas is exported to Egypt, where it is converted into liquefied natural gas (LNG) and shipped on to Europe. Egypt exported 8.9 billion cubic metres of LNG in 2022 – enough to supply Austria for a year, or Ireland for two years.
Iran is also a key factor for gas prices in Europe and the UK. In 2022 Europe was able to turn away from its biggest supplier of natural gas – Russia – without experiencing shortages by stockpiling LNG from the US and Qatar (an unusually mild winter also helped). A third of the world’s LNG, and a fifth of the world’s oil, passes through the Strait of Hormuz, which narrows to a channel little larger than the distance from Dover to Calais as it passes along the Iranian coast. The Iranian navy has seized or harassed ships in the strait in recent years, and long-range rocket launchers have been seen stationed on Iran’s islands.
Again, it is important not to catastrophise. UK wholesale gas prices have risen to their highest level since mid-February, but this remains far below the peaks reached after Russia’s invasion of Ukraine. Markets do not indicate that a blockade is likely, but elevated risk is already feeding through into shipping insurance; as before, consumers and governments will eventually foot the bill.
As happened after the Ukraine invasion, one country benefits from increasing risk in energy markets. Russia’s current account surplus for 2022 was a record $227bn, as the EU dithered in its imposition of sanctions and allowed narrow commercial interests to water down the G7 cap on the price of Russian oil and to help circumvent it. Russia’s oil profits declined in 2023, but its September accounts show revenues that have returned to the “windfall levels” seen this time last year, said Robin Brooks. “Funding for Ukraine now is getting more complicated; funding for Russia remains easy.”
The export controls designed to throttle Russia’s economy have become, Brooks said, “an absurd game of whack-a-mole”, as semiconductors and other supposedly sanctioned goods make their way through third countries such as Kyrgyzstan and Belarus. “You have to deal with the revenue, as opposed to the spending.”
In Western countries the opposite is true, as higher energy costs eat into purchasing power. In Marrakech, Brooks said the consensus was that economic growth in the UK and eurozone will “almost flatline… It’s not going to take much to tip these economies into outright recession, perhaps even a deep one.”
The West’s big mistake, said Brooks, has been to assume that Russia’s economy could gradually be starved, without too much disruption. Now, with a US presidential election a year away, energy markets have the potential to force yet more pain on Western governments and consumers, creating more opportunities for populists to campaign against climate change policies and support for Ukraine. The situation in Israel, he told me, “is a reminder: there is not much time at all”.
[See also: Will Israel launch a ground invasion in Gaza?]