How close are we to an all-out war in the Middle East involving the United States?
According to Benjamin Zycher, a Senior Fellow at the American Enterprise Institute (AEI), the answer to that question is “not close”.
When asked the same question, Michael Rubin, another Senior Fellow at the AEI, told Rigzone, “the danger would be Israel starting something they could not finish”.
“For example, bombing Iran but not eliminating its offensive capability. If Iran retaliates against U.S. forces in Bahrain, Kuwait, or the Emirates, it would be hard for Washington to stay aloof,” he added.
So, what would an all-out war in the Middle East involving the United States mean for oil and gas in the region?
“Some reduction in Middle East output, particularly if Kharg Island is destroyed,” Zycher said, highlighting that there would also be “some shift of production to the Saudis”.
Answering this question, Rubin told Rigzone that “the Middle East doesn’t any more have the monopoly on oil many imagine it does”.
He added, however, that “the markets are linked and any instability in the region would lead to a multi-week spike that would only slowly come down as other countries outside the region up their production”.
Commenting on what an all-out war in the Middle East involving the U.S. would mean for oil prices, Zycher outlined that it would lead to a “jump in the immediate term” and a “return to normalcy after some weeks”.
Conflict is Underway
Diana Furchtgott-Roth – Director, Center for Energy, Climate, and Environment, and The Herbert and Joyce Morgan Fellow in Energy and Environmental Policy, at the Heritage Foundation – highlighted to Rigzone that “conflict between Iran and Israel is underway”.
“This conflict, as well as perceptions of an escalation, drives up prices because of changes in the expectations supply,” Furchtgott-Roth said, adding “that’s why oil prices rose about $6 per barrel on Tuesday night”.
Furchtgott-Roth told Rigzone that prices are set by expectations of future supply and demand, not by current conditions.
“It is irrelevant whether the United States is openly involved or has indirect involvement due to its role as a supplier of weapons and a supporter of Israel,” the Heritage Foundation representative said.
Crisis Intensifying
An oil macro update from Rystad Energy Chief Economist Claudio Galimberti, which was sent to Rigzone today, noted that, “as of October 2, the crisis in the Middle East is intensifying, with increasing risks to oil supply”.
“Currently, Iran produces approximately four million barrels per day of crude, exporting about half of that, mostly to China,” the update added.
“In the event of a war directly involving Iran, the risk of reduction to its crude exports would become real,” the update went on to warn.
The update highlighted that OPEC+ spare capacity currently sits at more than five million barrels per day and outlined that this “could be deployed relatively quickly (within 60 days) to fill the gap”.
“However, if the Strait of Hormuz were to be impacted, then all bets would be off,” the update warned.
“In fact, more than 13 million barrels a day of crude passed through the strait in Q3 this year, and flows were as high as 15 million barrels per day in the first half of 2023,” it added.
“Any blockage to the strait would result in runaway prices, increasing quickly and steadily the longer the blockage persists,” it noted.
Oil Could Move Sustainably North of $100
In a report sent to Rigzone today, Bloomberg Intelligence analysts said oil prices could move sustainably north of $100 a barrel if Iran’s October 1 missile attack on Israel triggers a retaliatory cycle that targets energy infrastructure or closes the Strait of Hormuz.
“For now, oil output and flows remain undisrupted, and upward pressure on prices may remain subdued after … [Tuesday’s] intraday five percent jump, if escalation is avoided,” the analysts said in the report.
“Iran’s direct missile attacks on Israel have had a relatively muted impact on oil prices, with oil output and flows remaining undisrupted thus far, though a retaliatory cycle targeting energy infrastructure, not our base case, would result in a larger price spike,” they added.
“Direct attacks on energy facilities could severely disrupt oil production in the Gulf, the way Yemeni drone attacks on the Abqaiq oil facilities did in 2019,” they continued.
The analysts noted in the report that Iran’s last direct attack on April 13 had a limited impact on oil prices as further escalation was avoided.
To contact the author, email andreas.exarheas@rigzone.com