The Middle East and the international community is waiting to see how Israel will choose to respond to Iran’s attack.
The scenario of a strike on Iran’s oil industry has rattled the markets, causing fear in the energy sector.
According to an analysis by Politico, for several years, conflicts in the oil-rich region have often spooked markets, causing troubles for the global economy.
Over the last two decades, that has changed due to increased production from the U.S., and Brazil has diversified the global fuel market, meaning that markets are relying less on fuel from the Middle East.
What happens if Israel hits Iran’s oil industry?
“For those of us who spend our lives looking at the impact of a [Middle East] crisis on oil prices, obviously the last 10-plus years have been a complete failure,” said Michael Knights, an analyst at The Washington Institute for Near East Policy think tank.
He added that “although the situation in the Middle East is complex, the impact on oil is minimal. The market has proven time and time again that it can cover shortages.”
Nevertheless, the next stages of Israel’s conflict with Iran could test the resilience of the market in ways not seen in decades.
Why world powers fear conflict
Both the White House and the State Department did not respond to questions about whether the U.S. is advising Israel on how to manage the situation with Iran. Douglas Rediker, senior fellow for foreign policy, global economics and development at the Brookings Institution, said the Biden administration may try to persuade Israel not to target Iran’s major oil infrastructure and stick to military targets.
Their biggest fear is whether Iran will try to significantly escalate the conflict in order to draw other Middle Eastern countries and the United States directly into the fighting, Rediker argued.
Still, if Iran’s oil production is eventually severely damaged, that would reduce supplies by probably less than two million barrels a day. That’s a relative drop in the ocean in a global market that consumes 100 million barrels a day, Rediker said.
The United States or China could make up any supply shortfall with releases from their strategic oil reserves, he added.
The market learned the hard way
Many political leaders still remember the oil shock of 1970, when the Saudi Arabia-led oil-producing cartel imposed an embargo on the United States, causing oil prices to soar from $1.80 a barrel to $11.65, equivalent to a $66 increase in today’s dollars.
Despite Iran’s 2019 attack on Saudi Arabia’s critical Abqaiq oil processing plant in Abqaiq, which caused a brief price spike that quickly subsided. Today’s oil market is less dependent on one source of supply.
“The fact that Saudi Arabia has been so robust and has quickly restored energy security in the face of such aggressive action over half a decade ago has created a risk tolerance,” the analyst concludes.
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