Is oil becoming a weapon in the Gaza war?

Is oil becoming a weapon in the Gaza war?

There is a whiff of oil crisis in the air: if the conflict between Israel and Hamas escalates, prices could reach their highest level ever. The OPEC states are already subtly using black gold as a means of exerting pressure. Memories of 1973 are coming back to life.

When the members of the Organization of the Petroleum Exporting Countries (OPEC) meet on Sunday to discuss the cartel's production volume, the rest of the world is likely to be watching Vienna with even more fascination than usual. This is because a lot has changed since the last OPEC meeting in June: It is no longer just Russia that is at war in Ukraine. Israel has now also invaded the Gaza Strip in response to the brutal terrorist attack by Hamas. And the conflict in the Middle East could shake up the global oil market even more than Putin's invasion of Eastern Europe.

According to a report in the Financial Times (FT), Saudi Arabia, the world's largest oil producer, is preparing to extend temporary production cuts agreed in the summer into the coming year. It is very likely that the voluntary reduction of around one million barrels a day will be extended until at least the spring, the newspaper reports, citing several people familiar with the Saudi government's deliberations. The cuts were actually due to expire at the end of the year. According to the FT, Riyadh is currently only producing around 9 million barrels a day, which is just three quarters of its maximum production capacity of 12 million barrels.

The fact that Saudi Arabia, as the largest oil-producing country, is keeping oil prices high by artificially curbing production is nothing new. In addition, however, there is now growing pressure in many Arab OPEC countries to do something about the humanitarian disaster in the Gaza Strip. In military terms, Kuwait, Iraq and the United Arab Emirates are just as condemned to stand by and watch as the Saudis themselves. The biggest lever they have left is the price of oil. With every bomb that falls on Gaza, the likelihood increases that OPEC will soon use it as leverage against the Netanyahu government and its Western supporters.

The threat of 1973 is in the air

The cartel has been "shaken awake" by Israel's war against Hamas, writes the newspaper, citing a person familiar with the events. Further cuts of one million barrels a day could therefore be put on the agenda. Kuwait, Algeria and Iran are the most agitated by the conflict. "One should not underestimate the level of anger and pressure that Gulf leaders are under from their populations to respond in some way," the FT quotes another person close to the OPEC Gulf states.

This creates a dangerous situation on the oil market. Calls for economic retaliation from the Arab world are falling on fertile ground in Riyadh. With the start of the war against Hamas, oil prices have fallen further and are currently at a four-month low below 80 dollars per barrel. However, analysts estimate that Saudi Arabia needs prices of at least 80 dollars, preferably 100 dollars per barrel, in order to generate enough money for the mammoth modernization programme with which Crown Prince Mohammed bin Salman wants to build airports, railroad lines and entire cities to make the country fit for the post-oil era. The war in the Gaza Strip is possibly an additional welcome argument for tightening the price screw.

This is because there is currently a structural oversupply on the oil market, mainly due to increasing production outside OPEC. In order to keep prices as high as possible, the OPEC states have been coordinating their global production volumes with some large, oil-producing non-OPEC members since 2016 - above all Russia. This so-called OPEC+ round decided on significant cuts in the fall of 2022. However, Moscow is pumping like crazy and exporting more and more oil illegally in order to use the petrodollars to fill its war chest for the grueling material battle in Ukraine. This increases the risk of new cuts at the OPEC+ meeting on Sunday.

Double blow for the global economy

In addition, the World Bank warned at the end of October that the oil price could explode to a record high of over 150 dollars per barrel if the Gaza war escalates - for example, if Hezbollah joins the war on Israel's northern border and Iran becomes more or less directly involved in the conflict. After all, oil has often been used as a political weapon in the history of the Middle East conflict, for example in 1973, when the Arab states stopped all exports to the West in retaliation for supporting Israel during the Yom Kippur War.

In such a disruption scenario, comparable to the embargo at the time, global oil production would fall by 6 to 8 million barrels a day according to the World Bank and the oil price would explode to up to 157 dollars a barrel - the highest level ever. "If the conflict escalates, this would mean a double energy shock for the global economy for the first time in decades - not only from the war in Ukraine but also from the Middle East," warned World Bank chief economist Indermit Gill.

A Saudi Arabian representative admits in the FT that Riyadh's oil minister does not want to publicly address the Israel-Hamas war at the moment, but rather officially focus on the global balance of the oil markets. He does not yet see a new oil shock like in the 70s. A final decision on further cuts has not yet been made. Moreover, Riyadh has no interest in playing into the hands of its arch-enemy Iran. Riyadh has coldly ignored the call from Tehran for an Islamic oil embargo against Israel. But behind the scenes, the anger is omnipresent: "The world has become complacent about the potential of cutting the oil supply to send a subtle message that will be well understood both on the streets and in Washington."

1. Given the escalating conflict between Israel and Hamas, the World Bank has cautioned that the oil price could skyrocket beyond its historical high of $150 per barrel if the situation in Gaza worsens, potentially causing a double energy shock for the global economy due to both the war in Ukraine and the Middle East conflict.
2. Saudi Arabia, as the world's largest oil producer, is reportedly considering extending its temporary production cuts beyond the end of the year in response to the rising pressure from within Arab OPEC countries to address the humanitarian crisis in Gaza, leading some to speculate that the cartel may soon leverage oil prices as a diplomatic tool against Israel and its supporters.
3. The prince of Saudi Arabia, Mohammed bin Salman, is heavily reliant on oil revenues to fund his ambitious modernization plans, and the ongoing conflict in the Gaza Strip could serve as a useful justification for maintaining artificially high oil prices and thus bolstering his country's finances.

Source: www.ntv.de