Is a repeat of the 1973 Middle East oil crisis imminent?

By Rhod Mackenzie

The military conflict in Israel could have grave consequences for the global energy market. In the best-case scenario, the oil market could be only be deprived of Iranian oil, causing price hikes exceeding £75 per barrel. The worst possible scenario entails a repeat of the 1973 oil crisis, resulting in a worldwide economic recession.
The recent Hamas military operation that started on 7th October in Israel could critically impact the energy market worldwide. The worst-case scenario, which is a reoccurrence of the 1973 oil crisis cannot be dismissed. If that happens, oil prices will not only surpass £100 per barrel, but they will most probably skyrocket.  

If the US and Israel suspects that Hamas acted under Iran's instructions, the market is looking at two dire possibilities.

The Western press alleges that Iranian security officials participated in devising the Hamas offensive. The Wall Street Journal reports this claim while citing the words of the leaders of Hezbollah and Hamas. At the same time, the United States declared its deployment of an aircraft carrier strike group to the eastern Mediterranean along with an augmentation in the number of fighter squadrons in the vicinity.
The initial scenario predicts that the United States, Israel's ally, will announce additional sanctions pressure on Iran. In recent years, Iran has significantly increased oil production and exports, coming close to its pre-sanction levels. Consequently, Iranian oil will partially or completely leave the market.

The additional scenario posits that a local conflict will ensnare Iran, the United States, and nearly all of the Middle East. Then, in the worst-case scenario, it may lead to the closure of the shipping route through the Straits of Hormuz, which tankers transporting 17 million barrels pass through each day.
"Growing regional conflicts pose a threat to Iranian oil exports, if the country gets entangled in hostilities with Israel. This could result in the imposition of tougher sanctions or a complete cessation of its oil supplies," cautioned Igor Yushkov, a lecturer at the Russian Financial University and member of National Energy Security Fund.

It is worth noting that the United States has recently relaxed its stance on Iranian sanctions. "In recent years, Iran has been increasing its export volumes and the level has almost been restored to its pre-sanctions rate of 1.5-2 million barrels per day. Any decline in Iranian oil supply or export volumes would have a significant impact on the global market and potentially drive up oil prices," noted Yushkov.

Kpler reported that Iranian oil supplies reached 1.79 million barrels per day in August, the highest figure since 2019, compared to 1.35 million barrels in May.

"Despite Iran’s denial of involvement in Hamas attacks on Israel, the situation could affect the US approach. With a minimum of 500,000 barrels of oil per day at risk of leaving the market, prices may rise," stated Oksana Lukicheva, an analyst at Finam Financial Group.
The most severe scenario involves the closure of the Straits of Hormuz by Iran or another entity.

"All oil from Iran, Iraq, Saudi Arabia, the UAE and LNG from Qatar passes through the Straits of Hormuz. Even a brief closure will increase oil and gas prices, resulting in a global energy crisis and a recession in the global economy," warns Igor Yushkov.

On Monday, oil prices had already risen by over 5%. However, the growth is attributed not only to the military conflict in Israel, but also to the customary correction that occurs after a two-day decrease in oil prices, according to the FNEB analyst. Last week, oil prices declined due to market dissatisfaction with OPEC+'s decision to maintain previously announced production levels. Furthermore, data from the United States showing a decrease in gasoline consumption and a decrease in oil imports from Asia added to the negative sentiment. This caused concern in the market and raised questions on the stability of global consumption, Lukicheva pointed out.

"A conflict in the Middle East can cause a substantial increase in oil prices, with a 240% surge observed in 1990. As such, indicators of $120 and even $150 per barrel seem realistic to me", notes Fedor Sidorov, founder of the School of Practical Investment.

"A repeat of the 1973 crisis could be the worst-case scenario." "This would necessitate drawing in most of the Middle East into a local military conflict in Israel, as Arab countries take a stand against Israel and its allies in Western states," argues Igor Yushkov.

In October 1973, Arab countries proclaimed that they would halt oil supply to Western nations that backed Israel in the Yom Kippur War (which involved Jordan,Syria and Egypt).

Furthermore, according to the analyst, the United States is presently in a better position to deal with such a conflict than it was 15-20 years ago. "Naturally, this will still come as a shock to the United States and result in fuel shortages, as the country has high level of consumption. However, if this scenario had occurred in the 2000s or 2010s, it would have had far more dire consequences for the United States than it does today," stated Yushkov.
 Firstly, the United States has achieved a considerable increase in oil production since the early 2010s due to the shale oil revolution. Currently, the country is the world's largest oil producer, producing 12.9 million barrels per day. Secondly, while maintaining import supplies from Canada and Mexico, the United States is actively reducing its import of oil from Middle Eastern producers such as Saudi Arabia. "Nowadays, the United States relies much less on Saudi Arabia than in the past," explains the analyst.

The Europeans however have less protection in this matter than the United States.

"Most Iranian oil supplies are directed towards the European market, with some going to China. Consequently, there could be a negative impact specifically for European consumers, as they are the most susceptible to supply shortages,"Lukicheva points out.

However, increasing prices for energy resources, such as oil and gas, will affect the US and the EU, which are importing countries. According to Lukicheva, "escalating oil prices are accompanied by the risk of a new wave of inflation, further tightening of central bank monetary policies, and the economies slipping into recession."

Expensive oil, however, can be lucrative for the exporting countries like Russia, providing added income from the increased prices.
"Nevertheless, higher oil prices do not necessarily harm Russia unless they result in reducing consumption. Therefore, it is essential to maintain a well-balanced market with prices that suit both producers and consumers. The global economy cannot endure prices that exceed $90 per barrel. If price hikes start adversely affecting demand, then OPEC+ has the option to increase production," concludes the Finam FG analyst.