Oil Price and Dynamics of Israel Retaliation on Iran Scenarios
Oil Price Risk and Possible Scenarios of Middle East Escalation
In this article, we look at the current tensions in the Middle East, particularly between Israel and Iran, and their potential impact on global oil markets. Following missile strikes from Iran, oil prices have surged, raising concerns about possible escalations leading to a regional conflict that could disrupt oil supplies. Various scenarios regarding Israel’s potential military responses and their consequences for oil production and prices are explored.
Key Points
- Tensions Rising: Iran’s missile strikes on Israel have increased anxiety in the oil markets.
- Price Fluctuations: Oil prices rose by 10% recently, with concerns they could surge past $100 per barrel if conflict escalates.
- Potential Targets: Israel may target Iranian oil infrastructure; however, diplomatic repercussions could arise from such actions. Plus Iran may target other oil producing countries in the Middle East including Israeli oil production.
- OPEC+ Response: OPEC+ has spare capacity and plans to increase output to stabilize the market in response to any disruptions. Of course, this is based on non-damage to key producers such as Saudi Arabia and other Gulf states.
- Strategic Implications: Iran might retaliate against Gulf states or attempt to close the Hormuz Strait, which could have severe global repercussions.
The two major implications for the world and oil markets are shown below.
- Escalation of Conflict: If the situation deteriorates, we could see a full-fledged military confrontation between Israel and Iran. This would likely involve not only direct attacks but also cyber warfare and proxy engagements in other regions, such as Syria or Lebanon. Such an escalation could lead to disruptions in oil production and transportation routes, particularly through the Strait of Hormuz, which is critical for global oil shipments.
- Global Economic Impact: A significant rise in oil prices could have a ripple effect on the global economy. Higher fuel costs would lead to increased transportation expenses, impacting the prices of goods and potentially leading to inflation in many countries. Economies already struggling with post-pandemic recovery could be particularly vulnerable.
The Four Most Likely Escalation Scenarios
An article in The Economist outlines four possible options for the Israeli retaliation on Iran.
four main targets for possible Israeli strikes and the implications each could have on regional stability. Israel’s military leadership is divided on how to retaliate against Iran after missile attacks. The four potential targets for Israeli strikes include:
- Iran’s nuclear enrichment sites
- Strategic economic infrastructure like oil terminals
- Key Iranian leadership figures
- Iranian missile bases
The worst case scenarios would be if Israel targeted Iran’s nuclear enrichment sites and its oil terminals, specifically key exporting infrastructure. In both scenarios, Iran would most likely retaliate hard and not just against Israel but also oil producing states in the region such as Saudi Arabia, UAE, Kuwait and Bahrain for example. In other, Iran would use the indirect threat of blowing up Middle East oil production. This is something that the US, Europe, China, India, Japan and other major economies would not relish and would push inflation back up especially right before a US election. Thus, there will be enormous pressure on Israel not only from the US but also from strategists and generals within Israel to not take this route. The risk in this scenario is certaintly oil prices at $150 a barrel or much higher.
In addition, the fact that Israeli air defenses was able to prevent much damage from the Iranian missle strikes is sort of a fallacy and provides a false sense of security. First of all, Iran telegraphed not only when the attack would happen but also the types of missles it would use. Yes, Israel was able to defend itself with help from US ships as well. In the first Iranian missle attack, other Arab countries such as Jordan also helped in shooting down some missles. Thus, the generals in Israel are also calculating an Iranian missle response that would not give any warnings ahead of time and with many more missles. Iran and/or its proxy Hezbollah could also target Israeli oil and gas production capacity.
Finally, Iran and both the US do not want to see this escalate further and especially the US in an election year. This combined with the possible damage that Iran could cause on Israel in an all out escalation needs to be factored in. Also, don’t forget that both candidates, Harris and Trump, in the US presidential election are against further wars in the Middle East. Add in US regional allies like Saudi Arabia, Egypt, Jordan and the Gulf States and the pressure on Israel will be immense. Of course, Israel will also inflict probably more damage on Iran but the costs versus benefits are clearly not worth it as shown.
The other myth that is going around is that Israel has a chance to reshape the Middle East now that Iran is weak. After hitting at two Iranian proxies, Hamas and especially Hezbollah, reducing the threat on Israel, the thinking goes that Israel has a chance to severely weaken Iran now. This line of thinking is illusional. Yes, Israel has a strong military but on its own it cannot take on and damage Iran without US help. Secondly, Hezbollah although weakened still presents a threat. Thus, we see Netanyahu using rhetoric for both domestic purposes and international reasons. For example, he recently stated to the ‘people of Lebanon’ that now is their chance to rid of Hezbollah. We should see this as way to get divert focus from Gaza towards Iran and its proxies. Thus a strategy to win back the narrative from Iran. Note that Iran also used the Palatinian issue for its own geopolitical reasons. Proxies such as the Houthis capatilized on this to justify attacks on Red Sea shipping for example.
The point is that there is an active attempt for Israel to regain the narrative after Gaza. It wants to divert attention away from the Gaza strip for this reason. Don’t forget that Netanyahu and Israeli military will divide Gaza up into zones, probably three or more. The escallation with Iran and Hezbollah serves another purpose besides military.
Targeting the leadership of Iran is something Israel has been doing anyways. Under the current tensions, the top leadership will take extra precautions. Also, this could be counterproductive for Israel as it is likely to increase nationalism and support for the regime. In Iran, the hardliners would win in such a scanario. Furthermore, the impact of any military operation and this includes targeting leadership on U.S.-Iran relations cannot be overlooked. The Biden administration has expressed a desire to stabilize the region and maintain open channels with Iran, complicating Israel’s military calculus. For example, the US would not want to target the new President, a moderate, who is pushing to open channels with the US and the West again.
Thus, the most reasonalable scanaio in our opinion is to go after military targets in Iran and selective targeting of the leadership, perhaps hardliners and of course key scientists in the nuclear programme.
This would be more strategic for Israel since it would keep the tensions high with Iran but not high enough to escalate further into an all out war. The objective of diversion from Gaza serves both Iraeli national interests and also Netanyahu’s personal interests. Thus, a continued ground offensive in Lebanon with tit for tat strikes on Iran is the most likely scanario. For Iran, the strategy will be to desescalate and buy more time to rebuild.
