Open fighting between Israel and Iran, and missile and drone strikes on oil and gas facilities would once have triggered crisis in energy markets.
Yet after the 12-day war between Israel and Iran, joined by the US, oil prices are lower than when it started. Has the oil and gas industry learnt lessons from this brief conflict? More importantly, has it learnt the right lessons?
First, the market is not worried about disruption to energy supplies from the Gulf. Despite two of the Middle East's key military and political powers lobbing missiles at each other, despite the US directly bombing Iran for the first time ever and Tehran also countering for the first time by attacking the territory of a Gulf state, oil prices are lower now than before the conflict broke out.
After a brief 20 per cent rise, gas prices in Europe have also dropped to below their pre-June 12 levels, even though the continent needs Gulf liquefied natural gas (LNG) to make up for the loss of Russian imports.
Following much more nervous periods in the early 2000s, when a whiff of gunpowder could put $10 on the oil price, four factors are at play.
The rise of the US’s shale oil and gas output has diversified supplies, and it could increase output further in the case of a prolonged disruption and price spike.
Opec members hold major spare capacity in Saudi Arabia, the UAE and Iraq, while Iran’s own output has stagnated.
Saudi Arabia and the UAE have built or expanded pipelines that bypass the Strait of Hormuz.
And the world economy is less oil-dependent – a barrel of oil generates $2,500 of world gross domestic product today, up from $1,725 in 2000. Renewable energy and electric vehicles are now genuine alternatives at commercial scale to oil and gas.
But perhaps all these factors are secondary to the fable of the “boy who cried wolf”. Iranian politicos and military officials have often threatened to “close the Strait of Hormuz” at times of geopolitical tension and analysts have studied the possible threats, implications and countermeasures to exhaustion.
Yet nothing has happened, beyond in the past few years some minor and deniable explosions, and harassment of vessels by Iranian naval forces. This time, there was not even that, just some spoofing of GPS signals. Iran depends on the strait itself; interrupting transit would cut off its own exports and imports, and invite devastating retaliation. It is only likely to be attempted if the regime in Tehran has its back to the wall.
Of course, the fighting had some impacts on specific parts of the energy business, sharply pushing up diesel and jet fuel prices, tanker hire rates and insurance. But overall, the oil market appears to have decided that it will wait to see real physical disruption or destruction before reacting dramatically.
Second, there is still restraint in targeting energy sites. Probably not wanting to be blamed for causing a global energy crisis, Israel did not attack Iran’s oil export capacities. Its strikes against domestic oil depots and gas processing plants appear more in the nature of a warning and have not caused long-lasting disruption.
Iranian missiles did damage facilities at the Bazan plant in Haifa, one of Israel’s two oil refineries. But Israel’s three offshore gasfields have avoided damage, even though since October 2023, they have seemed like obvious, critical and hard-to-defend targets for missiles or drones from Iran or its allies, notably Hezbollah.
Third, the Gulf countries’ outreach to Iran, and the assistance of China in mediating the Saudi-Iran normalisation of March 2023, has been helpful in keeping them out of conflict. Doha was certainly not happy to have Iranian missiles targeted at the US’s Al Udeid base on its soil, but no serious damage was done and the Iranians were quick to make it clear that the nation of Qatar was not their target.
But what if these lessons are false? Or, at least, not teaching us what we think? Complacency in such critical matters could be catastrophic.
Restraint tends to fall away as conflicts draw on. Weapons are used with greater ingenuity and desperation. Ukraine has showed that well with its increasingly sophisticated penetration of Russian defences, its strikes against oil refineries, key bridges and rail lines, and bomber bases.
Iran and, before it, Hezbollah were taken aback by the elimination of so many key commanders early in the conflict. That may have limited their ability to execute more damaging retaliation this time. Aerial and maritime drones give capacity for much more precise strikes than were possible in previous periods of panic in the early 2000s.
Israel and the US have given mixed messages on whether their goal was the elimination or setback of Iran’s nuclear programme, or regime change. If the Islamic Republic were seriously in danger of destruction, though, it would become far more likely to use whatever remaining leverage over world energy supplies it had. The boy who cried wolf, of course, was eventually eaten by a wolf.
In some ways, the global energy system is more robust than in the early 2000s. In others, it has become more vulnerable – because of the loss of Russian gas to Europe, the much greater reliance globally on Gulf LNG, and the disruption of shipping through the southern Red Sea.
As former Egyptian president Anwar Sadat used to say, “the US holds 99 per cent of the cards in the Middle East”. It may not be so high these days, and Sadat himself admitted in private, “The United States actually holds only 60 per cent”.
But neither of Iran’s backers, China or Russia, seem to hold even 10 per cent, nor were of any obvious use in halting the Israeli or American attacks. Concern for what Beijing thinks might hold back Tehran from attacking its Gulf neighbours, but the fear of US retaliation remains a bigger restraining factor.
We have, so far, got away with an exceptionally dangerous situation. The solutions are threefold.
First, regional states including the Gulf should continue building energy security and resilience, including better defences, and diversified infrastructure.
Second, energy importers should accelerate their efforts on non-petroleum technologies, bringing environmental as well as security gains.
Third, the region and the key external players need to move beyond fragile ceasefires, containment and the rule of the gun, to multilateral peacebuilding.
