Oil and war

Ahmed Mustafa
Tuesday 30 Apr 2024

Though nervousness about an Iran-Israel escalation has subsided, the oil market is still unstable, with the US benefiting from the rising tension.

 

Tehran is set to release the crew of a ship it seized the day before it attacked Israel with drones and missiles in retaliation for the Israeli strike on the Iranian consulate in Damascus, which killed a number of Iran’s Revolutionary Guard Corps (IRGC) commanders.

This appears to be an indication of tensions easing up following a direct military exchange between Israel and Iran that had the potential to flare up into something much more calamitous.

By the weekend, Iranian media reported that Foreign Minister Hossein Amirabdollahian told his Portuguese counterpart Paulo Rangel in a telephone call that the “humanitarian issue of the release of the ship’s crew is of serious concern to us”. The crew of the Portuguese-flagged ship linked to Israel has been granted consular access and are expected to be freed.

IRGC seized the container vessel MSC Aries with a crew of 25 in the Strait of Hormuz on April 13, threatening to close the crucial shipping route. MSC leases the Aries from Gortal Shipping, an affiliate of Zodiac Maritime, which is partly owned by Israeli businessman Eyal Ofer.

As the Israeli response to Iran’s attack was “measured” and didn’t lead to escalation, many around the world breathed a sigh of relief. But the war on Gaza is still raging, and the tension is not fully eased. Markets are fretting and oil prices are still high. That might be cause for concern to energy-consuming countries, especially the US in an election year.

Some analysts note that American pressure on Israel contained its conflict with Iran, to prevent an escalation that would have sent oil prices skyrocketing. Though the US does not rely as much on oil imports from the Gulf, global price rises in general would push fuel prices at the pump for American citizens, hurting President Joe Biden and his Democratic Party’s chances in November elections.

Aside from Iran, threats to maritime shipping including oil tankers in the Red Sea remain. Iran-backed Houthis in Yemen are not deterred by a US-led naval coalition in the region. The most recent attacks from this weekend targeted a ship and an American drone.

According to Houthi military spokesman, General Yahya Saree, in a televised video address, the British oil ship Andromeda Star was targeted in the Red Sea with naval missiles and was directly hit.

Houthis promised more attacks in opposition to Israel’s war on Gaza. Saree also said Yemeni Air Defence Forces shot down an MQ-9 Reaper attack drone of the US military with a missile in the airspace of the Saada governorate “while it was carrying out hostile missions”.

The US military did not comment on the drone, but America broadcaster CBS News confirmed that an MQ-9, which costs about 30 million dollars, “crashed” inside Yemen early on Friday. This would be the third US attack drone shot down by the Houthis since the start of the war on Gaza.

Many expected the US to tighten and expand sanctions on Iran, but the measures announced last week were not up to those expectations. Some market experts conclude that Biden’s White House would not want to curb Iran’s energy exports to avoid rising prices. The US Congress approved a security package, including sanctions on foreign ports, vessels and refineries involved in the trade of sanctioned Iranian petroleum products.

But S&P Global Commodity Insights commented: “The Biden administration may leverage new Iran sanction measures included in the recently passed US security package to pressure Chinese buyers to reduce exposure to Iranian oil, but the legislation is unlikely to have a big impact on oil trade in the near term.”

In fact, the US is mainly focusing on China and other Asian countries importing oil from the Middle East. Independent refineries in Asia began to increase their imports of American and African crudes at the expense of the Middle East. It is not only the fear of Iran closing the Strait of Hormuz, but the US is also selling its oil to Asian refineries for less than Saudi Arabia for example, as Global said this week.

When the war in Ukraine started in early 2022, the Americans were pressuring Europeans to cut Russian energy imports as part of a sanction regime against Moscow. As that happened, American energy companies became the number one exporter of Liquefied Natural Gas (LNG) to Europe. The US also increased its oil exports to Europe in the last few years, adding tens of billions of extra profits to major American energy firms.

The US is now the biggest oil producer in the world, at more than 13 million barrels a day (mbd), far exceeding Saudi Arabia and Russia. American energy companies’ strategies indicate that US oil production could reach 15 mbd in a few years. America has also become a net exporter of oil, selling more than four mbd to customers in Europe and Asia.

In a similar way to the effects of the war in Ukraine, tensions in the Middle East provide an opportunity for the US to dominate the supply side of the global oil market, eating into the share of OPEC and its allies. Keeping protracted low-intensity conflict zones active serves that purpose, and is probably more important to Washington strategically than technical oil price fluctuations.

* A version of this article appears in print in the 2 May, 2024 edition of Al-Ahram Weekly

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