A series of intense military exchanges between Iranian-backed terrorist organisation Hezbollah and Israel over the weekend align with the Islamic Republic’s intention to keep pressure on Israel and its key Western allies through multiple indirect mechanisms rather than by direct action from Iran, a senior source in the European Union’s (E.U.) energy security complex exclusively told OilPrice.com. “The incidents on Sunday [25 August] involving Hezbollah and of the previous weeks involving the Houthis stepping up attacks in the Red Sea signal the principal way in which Iran intends to retaliate for recent Israeli attacks on it and its proxies,” he said. “Using Hezbollah and Houthi to carry out such strikes puts some distance between Iran and Israel in order not to directly provoke Israel’s key sponsor, the U.S.,” he added. “However, despite the attacks coming from Iran’s proxies rather than the sponsor itself, it may well be that the situation spirals from here, and Hezbollah has already said that its recent attacks [on Sunday] are just the first phase of its response to the assassination of its senior commander Fouad Shukr [in a strike in Beirut on 30 July] that it believes was done by Israeli forces,” he underlined.
The scale of Israel’s pre-emptive attack on Hezbollah’s Lebanese bases is the largest seen since the all-out war between Israel and Hezbollah in 2006 and a further escalation would pose much bigger problems for Tel Aviv than its ongoing war with another Iranian proxy terrorist group, Hamas. Hezbollah is on another level entirely, with around 100,000 in its fighting force, a huge arsenal of weapons including up to 200,000 rockets and missiles, and all of this positioned directly to Israel’s north. It is also a key beneficiary of help from Iran in the training of its fighters and in the supply short-, intermediate, and long-range unguided ballistic missiles and short-range guided ballistic missiles capable of hitting all of Israel’s major population centres. Its history of warfare against Israel stands out as uniquely successful among its Middle Eastern neighbours, having driven Israeli forces out of Lebanon in 2000 and having fought them again in 2006, that time to a stalemate. A full mobilisation of Hezbollah against Israel, at the same time as ongoing conflict on another front against Hamas could significantly stretch Israel’s defence capabilities – even more so if augmented by aerial attacks on Israel by Iran, or by additional forces from Syria to Israel’s northeast supported by the Iranian military and its proxies. “It is another element of threat thrown into the mix, as another war with Hezbollah could draw in other anti-Israeli fighters from across the region, encouraged by Iran or not, with all the potential for increasing involvement by the superpowers that this involves,” said the E.U. security source.
Related: Oil Prices Soar as Geopolitical Risk Rises Rapidly
At the same time as this, it is likely that attacks against oil shipping in and around the Red Sea area are further stepped up, he thinks. Less than a week ago, the Greek tanker Sounion and another as-yet unnamed vessel were attacked, mirroring actions undertaken by naval elements of Iran’s own Islamic Revolutionary Guards Corps (IRGC) that preceded the 7 October 2023 Hamas attacks on Israel. At the beginning of May 2023 in and around the Strait of Hormuz, Iranian forces seized two oil tankers in a week, although neither the Niovi nor the Advantage Sweet were anything directly to do with Israel. Instead, the E.U. source exclusively told OilPrice.com at the time, it was done to demonstrate that the Islamic Republic still had control over the key transit route that sees around 30 percent of the world’s oil transported through it. As a result of those two seizures, oil and shipping insurance prices did rise, albeit temporarily, as also happened after the 19 November 2023 hijacking of the Galaxy Leader by the Houthis. However, it was interesting to note even back then that the follow-through in the oil price was limited, despite threats from the Houthis’ spokesman, Alameed Yahya Saree, at that time that the group intended “to sink” Israeli ships in the Red Sea. The same can be said for the 21 August 2024 attacks on shipping.
Partly this was due to the avoidance of the area by many major oil companies that decided to use the longer Cape of Good Hope route instead. Partly as well it can be attributed by the ramping up of security in the region’s waters by the U.S. and its allies towards the end of last year in the shape of ‘Operation Prosperity Guardian’. This multilateral naval task force was designed precisely to guard against such future Iranian or Houthi attacks on oil shipping in the Red Sea region. Indeed, IMF PortWatch data shows average daily ship transits via the Red Sea route’s Bab al-Mandab Strait stood at 23 in the week ended 11 August 2024 against 70 on the same day last year. Alongside this came China’s efforts to dampen down a sustained escalation of attacks in the region either directly by Iran or by its Houthi proxies. Following the ‘Iran-China 25-Year Comprehensive Cooperation Agreement’, as first revealed anywhere in the world in my 3 September 2019 article on the subject and as analysed in full in my latest book on the new global oil market order, Beijing exercises enormous influence over Tehran. Through this and other similar deals in the region, China has a hold over the Bab al-Mandab Strait, through which crude oil is shipped upwards through the Red Sea towards the Suez Canal before moving into the Mediterranean and then westwards.
Crucially in the oil market, the U.S. and China share the desire to keep prices at the historically lower end. As analysed in full in my latest book on the new global oil market order, prices over US$75-80 per barrel significantly increase the chance of the U.S. economy slipping into recession. Historical precedent has been that every US$10 per barrel change in the crude oil price results in a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent that the average price per gallon of gasoline rises, more than US$1 billion per year in consumer spending is lost. And if the U.S. economy is in recession two years out from a major election (presidential or mid-terms) then the chances of the incumbent party in power winning are dramatically reduced. Since the end of World War I in 2018, the sitting U.S. president has won re-election only once out of seven such occasions (and even the one is debatable). Meanwhile, China since 2017 has been the world’s largest gross importer of crude oil, which remains key to powering its still-stuttering economic recovery from the devastating Covid period. Additionally important to Beijing is that the economies of the West remain its key export bloc. According to the E.U. source, the economic damage to China – directly through its own energy imports and indirectly through damage to the economies of its key export markets in the West – would dangerously increase if the Brent oil price remained over US$90-95 per barrel for more than one quarter of a year.
However, it may be that Iran believes a further escalation by its proxies is the optimal way for it to respond to the recent series of Israeli attacks on it, regardless of pressure from China. Backing Hezbollah into bigger attacks against Israel would be one such method of doing this, as would increasing Houthi-led aggression against Western vessels in and around the Red Sea. Another would be to use the Houthis to launch attacks on Saudi Arabia’s key oil installations. The last time the Houthis launched major coordinated attacks against the Saudi Arabian mainland - on 14 September 2019 against the Abqaiq oil processing facility and Khurais oil field - Saudi Arabia’s oil production was halved, causing the biggest intra-day jump in U.S. dollar terms since 1988, as also analysed in full in my new book on the new global oil market order.
Exactly what such actions might mean for the oil price was delineated by the World Bank shortly after the 7 October Hamas attacks. It stated that a ‘small disruption’ – with the global oil supply being reduced by 500,000 to 2 million bpd (roughly the same as the decrease seen during the Libyan civil war in 2011) – would see the oil price initially rise 3-13 percent. A ‘medium disruption’ – involving a 3 million to 5 million bpd loss of supply (roughly equivalent to the Iraq war in 2003) would drive the oil price up by 21-35 percent. And a ‘large disruption’ – featuring a supply fall of 6 million to 8 million bpd (like the drop seen in the 1973 Oil Crisis) – would push the oil price up 56-75 percent.
By Simon Watkins for Oilprice.com
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