[Salon] Iran, Israel and the price of oil

[Chas Freeman <cwfresidence@gmail.com>]

Iran, Israel and the price of oil

Summary: Israeli retaliation for Iran’s missile attack last week is inevitable and may well mark a further escalation, especially if Israel is indeed aiming fundamentally to shift the balance of power in the region and attempt regime change in Tehran. Nevertheless, the perceived threat to oil may be overstated.

We thank our regular contributor Alastair Newton for today’s newsletter. Alastair worked as a professional political analyst in the City of London from 2005 to 2015. Before that he spent 20 years as a career diplomat with the British Diplomatic Service. In 2015 he co-founded and is a director of Alavan Business Advisory Ltd. You can find Alastair’s latest AD podcast, Of peak oil, grey rhinos and $70 a barrel here.

A year on from Hamas’s attack on Israel, it is becoming increasingly clear that Israeli Prime Minister Benjamin Netanyahu is determined on a fundamental shift in the balance of power in the region. In other words, the Israelis’ escalation is no longer ‘just’ about neutralising threats on their borders but also about defenestrating Iran itself.

As recently as late September, many experts believed that the Israeli Defence Forces (IDF) were not ready for an escalation against Hezbollah. However, even land incursions into Lebanon have since gone ahead, suggesting that Mr Netanyahu may be in a hurry to advance his objectives. Although domestic considerations seemingly prevent any US president from bringing to bear sufficient leverage to constrain the Israeli prime minister, the prospect of a possible election victory for Kamala Harris might have added a greater sense of urgency. This may not be out of concerns over Ms Harris per se despite her campaign efforts to retain the support of the pro-Palestinian wing of her party. Rather it could be rooted in the fact that in the event of a Harris presidency, Philip Gordon, a foreign policy pragmatist who was one of the prime movers behind the Iran nuclear deal, would likely be appointed as National Security Advisor and, as such, bring influence to bear on US policy over Iran which would not be to Mr Netanyahu’s liking.

This is not to say that Mr Netanyahu is aiming to 'get the job done’, whatever this means, before 5 November. However, he may well be looking to be in a position to try to take any remaining decisive steps quickly thereafter irrespective of the election outcome.

If Donald Trump were to win a second term the post-election Biden Administration in its dying days would be even more powerless to apply a brake on Israel than it is today. Moreover, Mr Netanyahu would have the reassurance of knowing that he would likely have an even freer hand under an incoming Trump administration.

However, a still more troubling scenario could unfold in the event of a Harris win, which would in all probability be contested by Mr Trump and his supporters even more vehemently — and violently — than was the case in the wake of the 2020 election. In 2022, Hal Brands and Michael Beckley published ‘Danger Zone: The Coming Conflict With China’, the starting premise of which is China looking to take advantage of post-election disarray in Washington by invading Taiwan. I have consistently argued that this particular scenario is unlikely to unfold. Nevertheless, I can see other actors looking to take similar advantage, not least both Israel and Iran.

Close to one-fifth of the world’s crude oil is supplied by Gulf countries through the Strait of Hormuz, which is twenty-one miles wide at its narrowest point and abuts southern Iran [photo credit: Iran Wire]

The timing of the escalation against Hezbollah is, in my opinion, consistent with this from Israel’s perspective. After all, Hezbollah has long been Tehran’s major source of deterrence against Israel. So, militarily, it makes total sense to cut down to size the missile threat posed by Hezbollah before making a major move against Iran itself.

It follows that talking about Israeli ‘retaliation’ options in response to last week’s missile attack by Iran is misleading in that Israel has almost certainly been weighing for some time options for strikes against Iran in the imminent future irrespective of any action which Tehran might take first. Nevertheless, the list which the BBC’s Frank Gardner set out in his 2 October article remains pertinent, as follows:

• ‘Conventional military’, i.e. strikes against Iran’s arsenal of missiles and related facilities, including air defences, as well as the IRGC’s command and control hubs;
• The nuclear programme, bearing in mind that several are notably difficult targets for conventional munitions; and,
• Economically important targets, including oil-related infrastructure.

To this list, I would add a fourth option of looking to decapitate the regime. This would be consistent with the approach Israel has adopted with both Hamas and Hezbollah and it is a possibility of which the Iranians are reportedly very mindful. Presumably, the hope would be to stimulate another determined drive by ‘ordinary’ Iranians to drive out the present regime even though the depressing history of regime change across the Middle East gives one no reason to be optimistic that something more benign would follow.

One way or the other, as Amanda Taub explored in a 4 October article in The New York Times, game theory tells us that last week’s missile attack on Israel “doesn’t necessarily mean that Iran is trying to escalate the conflict.” Rather, as Iran/Israel conflict expert Daniel Sobelman argues “that kind of escalation can be used to deter an open conflict.” Thus:

The question now is whether Israel will see it that way — and, even if it does, whether the Israeli government will view this moment as an opportunity to do further damage to Iran now that the threat of retaliation by Hizbollah seems to have been substantially reduced. If that happens, it is not clear how far the situation might escalate, or how the United States and other Israeli allies would react if it did.

 Amid such uncertainty, it is hardly surprising that the price of Brent crude has rallied back above the recently demolished ‘floor’ of US$75 per barrel (pb). However, and even though further escalation is, in my view, inevitable:

• It is by no means certain that Israel will attack Iran’s oil infrastructure, which would inevitably result in civilian casualties and could therefore cause some rallying behind the regime;
• If Iranian exports of around 1.6m barrels/day were to be removed completely from the market, any shortfall in supply could quickly be covered even if Saudi Arabia were to hold back from beginning to unwind its voluntary cuts in December; and,
• The ‘nightmare’ scenario of blocking the Strait of Hormuz for any length of time is far from straightforward.

In short, the balance of probabilities is that we shall see the pattern of the past year repeated yet again and the price of oil falling back towards US$70pb in the coming days, followed by more, fairly modest volatility as the conflict in the Middle East continues to evolve.

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