As nearly 200 Iranian missiles were launched towards Israel on Tuesday 1 October, Israeli officials gathered in an underground bunker to begin planning their response. In a video released the same evening Benjamin Netanyahu committed to making Iran “pay” for the attack: “Whoever attacks us, we will attack him,” he declared.
It is not only Iran that may end up paying, however; the shape of Israel’s response could have profound implications for the global economy. On 3 October, Joe Biden told journalists in the US that he had been “discussing” the possibility of strikes on Iran’s oil infrastructure with Netanyahu. Crude oil prices rose sharply in response. A sustained conflict could disrupt not only Iran’s energy exports, but those of other countries in the region. A prolonged surge in global energy prices could increase the risk of inflation and recession in the UK, US and Europe. The implications could spread to the US presidential election and the war in Ukraine.
As we saw in the aftermath of Russia’s invasion of Ukraine, energy crises have the power to reshape politics around the world; the market disruption that removed Liz Truss as prime minister had its roots in the estimated £150bn to which her government was forced to commit to support households and businesses in the face of surging gas prices.
Iran’s influence on global energy prices is significant, not only because of the almost four million barrels of crude oil it produces per day (about 4 per cent of global supply) but because of its geopolitical position on the Strait of Hormuz, the thin corridor of water through which almost all the energy exports of the Persian Gulf must pass. Around a fifth of the world’s petroleum liquids and liquefied natural gas pass through the Strait.
It is the prospect of a longer conflict that affects energy exports passing through the Strait of Hormuz that most concerns analysts. Despite the conflict of the past year and the devastating humanitarian crisis in Gaza, oil markets have been relatively stable; prices sank last month to a nine-month low, but the threat of an Israeli strike on Iranian infrastructure pushed prices back above $80 a barrel.
Henning Gloystein, a specialist in oil and gas markets and geopolitics at the political risk consultancy Eurasia Group, says the most likely outcome – which Eurasia Group estimates at a 50 per cent likelihood – is a relatively contained security crisis in which Israel strikes the infrastructure used for Iran’s domestic energy supply, not its exports. According to Goldman Sachs Research, these are well defined: Iran’s oil exports are heavily concentrated in a single terminal called Kharg Island, and while it is rich in natural gas – the South Pars gas field, which it co-owns with Qatar, is the largest in the world – it uses almost all of its supply domestically.
However, Eurasia Group also predicts a 40 per cent likelihood that the conflict will escalate. “If you start attacking Iran’s export of production infrastructure, you are disrupting global oil flows,” said Gloystein, who says there is about a 10 per cent chance that the conflict would escalate to the point at which Iran begins to disrupt exports through the Strait of Hormuz. “If the Saudis, the Emiratis, the Kuwaitis, Iraqis or the Iranians can’t get oil out of Hormuz, there’s very little alternative.”
Iran and its proxies have shown a willingness to attack other countries’ oil infrastructure. An attack on two major Saudi Arabian facilities in September 2019 briefly halved Saudi oil production; it was claimed by Yemen’s Houthi rebels, but UN investigators reported this was not the case and the attack was widely believed to have been orchestrated from Tehran.
The global consequences of such escalation would be severe. “If crude oil prices shoot to above or to $90 per barrel,” said Gloystein, “there’s a higher risk that the UK, EU or US are tipped into recession – especially Europe.”
The spectre of recession, or of gasoline prices reaching a totemic level such as $5 a gallon – as they did in June 2022 – could not have come at a worse time for the Democrat presidential campaign. Despite the exceptional recovery of their economy, Americans generally have a dim view of Bidenomics. “The Biden-Harris team has most to lose in this situation,” agreed Gloystein. “Biden has been talking about an imminent ceasefire since mid-February.”
Senior Democrats have raised the possibility that Netanyahu is refusing to sign a ceasefire agreement before the US election on 5 November because he believes it would be beneficial to Donald Trump, whom he described in 2020 as “the best friend Israel ever had in the White House”. Biden himself acknowledged this possibility when he told reporters last week: “Whether he’s trying to influence the election, I don’t know. But I’m not counting on that.”
Aside from Trump, the other clear winner from an oil price spike would be Vladimir Putin. As in the past, Russia would, as the world’s second-largest oil producer, stand to gain from rising prices. Most (around 90 per cent) of Iran’s oil exports go to China, and if exports from the Middle East are constrained, Russia will be able to export at very favourable prices, using a fleet of tankers it has assembled under Europe’s nose, further swelling its current account and underwriting its war in Ukraine.
This, then, is perhaps the decisive test of whether American diplomacy can restrain Netanyahu, and whether Netanyahu can in fact be restrained. How telling it would be if diplomacy at last became effective, after a year of conflict characterised by accusations of war crimes, in order to prevent Americans paying more to drive their cars.
[See also: Israel and Iran’s final reckoning]
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