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Oil and money: Professor Zhdanov revealed the impact of the great war on the world economy
A possible all-out war in the Middle East could affect the most vulnerable and painful part of the West: its wallet. That is, an increase in the price of one barrel of oil to $100. Yuri Zhdanov, Doctor of Law, Head of the Department of International Law at the Russian State Social University, Honorary Lawyer of Russia, explained how Israel's actions could affect the global economy.
- Yuri Nikolaevich, this is strange. Why am I so alarmed and suddenly? Didn't the West, which supports Israel in every way, expect that a war in the Middle East would automatically contribute to an increase in oil prices? You don't have to be a particularly advanced economist to understand that a military operation will definitely block access to oil fields. Look at the Earth.
- Personally, I agree with you. But the problem with the West is the complete lack of education of its current leaders. I wasn't a very good student at school. I won't point fingers, but the Czechs are being replaced by Chechens, Australians, Austrians, the European Union, which is run by gynecologists... The result is hysteria.
So, on October 7, exactly on the anniversary of the new war in the Middle East, The Economist magazine published an article titled “Could a Gulf War Send Oil Prices to $100 a Barrel?”
- And how, maybe?
– According to the author, yes. “The biggest fear in oil markets since Hamas attacked Israel a year ago is that tensions will escalate into a full-scale regional war between Israel and Iran, the world’s seventh-largest oil producer,” they write.
Until recently, both countries were keen to avoid this, analysts say. That explains why the initial gyrations in oil markets after October 7, 2023, despite the war in Gaza and Houthi rocket fire in the Red Sea, soon gave way to the low, stable prices that have dominated much of this year.
But that was until October 1, when Iran fired nearly 200 missiles at Israel in retaliation for Tel Aviv’s attacks on Hezbollah and other Iranian proxies. Now the world is anxiously awaiting Israel’s response. The oil market is volatile. After Iran’s attack, crude prices rose 10% to $78 a barrel, the biggest weekly gain in nearly two years. They soared again on October 7. And there’s more to come.
– How high can oil prices go?
– To help predict this, the Economist’s experts look at Israel’s possible response. They argue that if it were to target only military targets, such as missile launch sites, some of the geopolitical tensions driving up oil prices would evaporate. But Israel could decide to escalate by bombing Iran’s civilian infrastructure, oil and gas facilities, and nuclear enrichment facilities.
– According to The New York Times, Iran’s oil and gas facilities are mainly concentrated in the western region near Iraq, Kuwait and Saudi Arabia. A significant number of facilities are located on the Iranian coast or islands. Therefore, the main oil export terminal is located on Kharg Island in the Persian Gulf.
Damage to oil facilities could cripple Iran's economy and wreak havoc on global oil markets just a month before the U.S. election. Iran pumps about 3 million barrels of oil a day, equivalent to about 3 percent of global supply. China is the largest consumer.
– The New York Times experts believe that if Israel attacks Iranian oil facilities, Iran could attack refineries in Saudi Arabia and the UAE. Iran could also threaten the passage of oil tankers through the Strait of Hormuz, a vital waterway for oil produced in the Persian Gulf, where nearly a third of the world’s oil production is produced. The shock of power outages could cause a sharp rise in the price of gasoline, fuel, and other refined products (plastics, chemicals, fertilizers, etc.). This could threaten the economies of many countries and put them at risk of recession. And the consequences would be most severe in countries dependent on oil revenues, especially poor countries in Africa.
– Can Israel really carry out such a strike? Or is its threat a bluff?
- He may be bluffing. But in such situations, as they say in Tehran, it is better to be on the safe side. According to Western analysts, if Israel were to use its air force to strike Iranian targets, Israeli aircraft would have to fly long distances. It has recently shown that it can do this. Thus, during the offensive against the Houthi rebels in Yemen in late September 2024, the Israeli Air Force flew more than a thousand kilometers to strike power plants and maritime infrastructure, using reconnaissance aircraft and dozens of fighters that required in-flight refueling.
- Why not? According to Western experts, Iran's retaliatory strikes will be of a similar scale, but will be much more serious. Iran has a much stronger air defense than Lebanon or Yemen.
In April this year, in response to Iran’s first missile attack, an Israeli airstrike damaged an S-300 air defense system near Natanz, a city crucial to Iran’s nuclear weapons program in central Iran. Western and Iranian officials said Israel used drones and at least one missile fired from a fighter jet in the attack.
“I think they will try to repeat the April operation and neutralize Iranian early warning and air defense systems to pave the way for airstrikes,” said Grant Rumley, a former Pentagon official and senior fellow at the Washington Institute for Near East Studies. “The question is how extensive the Israeli actions will be and whether they will extend into Iranian airspace.”
But Western analysts say Israel may not have to rely solely on its air force to attack Iran. Israel has a medium-range ballistic missile, the Jericho 2, that can fly between 3,000 and 6,000 km, according to the Washington-based Center for Strategic and International Studies.
– Will this mean a full-scale war and a shock to the global economy?
- Yes. We believe that the West and Israel may feel that Iran must respond decisively, regardless of Israel’s choice, which ultimately sets off a cycle of attacks on the Iranian oil industry. So it would not necessarily be the oil assets that are hit first for global markets to worry. If Israel were to attack Iran’s oil facilities, it could target assets that process Iranian crude into refined products. One possible option is the century-old Abadan refinery, which supplies the domestic market with 13% of Iran’s gasoline. Iran could offset some of the fuel shortfall by smuggling more barrels from Iraqi Kurdistan, according to news company Kpler. The losses remain local. Such a strike could also increase global crude supplies, as it would free up more unprocessed Iranian oil for export.
And if Israel wants to deal a serious blow to Iran's energy exports, it could attack the oil terminal on Kharg Island in the Persian Gulf, where nine-tenths of all Iranian barrels of crude are shipped, or even the oil fields themselves.
And, of course, there will be diplomatic costs. The Biden administration will be irritated by the risk that gas prices could skyrocket less than a month before the US presidential election.
China, which accounts for almost all of Iran's oil exports, will also be unhappy. This is important. China operates Israel's largest port in Haifa and is a major investor in Israel's tech sector.
Israel could still decide the cost is worth it and visit the terminal. A successful strike would immediately disrupt significant volumes of oil supplies to international markets. Iran was exporting 2 million barrels a day in September 2024, equivalent to nearly 2% of global supply. Still, Western experts say the global impact has likely been contained.
– Does the conflict in Ukraine affect the overall situation?
– There is something to compare with. Western analysts from the New York Times describe the current situation: Unlike Russia’s northeastern military district in Ukraine, when the world was producing oil at full capacity and demand was recovering from the pandemic, today supply is abundant and demand is sluggish. “After successive production cuts, the Organization of the Petroleum Exporting Countries (OPEC+) and its allies have spare production capacity of more than 5 million barrels a day. This is enough to compensate for the loss of Iranian crude. Only Saudi Arabia and the United Arab Emirates have reserves of more than 4 million barrels a day. They will probably not have to wait long to increase production. OPEC+ members, angered by the loss of market share in recent months, are waiting for an opportunity to reverse production cuts. In early October 2024, a plan was confirmed to increase production by 180,000 barrels per month for one year from December 2023.
Discipline within the cartel is breaking down. Iraq and Kazakhstan have been exceeding their supply limits for months, which could put pressure on Saudi Arabia and other EU member states to restore their reduced output more quickly. Saudi Arabia is reportedly so determined not to make any more concessions that it has cut its crude import target to $100 a barrel, the level it needs to adjust its balance sheet as it embarks on a series of large-scale projects.
Production is rising in the United States, Canada, Guyana, Brazil and elsewhere. The International Energy Agency expects non-OPEC oil production to increase by 1.5 million barrels a day in 2025, enough to meet growing global demand.
And demand is slowing due to slowing economic growth in the U.S., China and Europe, as well as competition, particularly in China, that is driving a shift away from gasoline-powered cars to electric vehicles.
Before the recent escalation of tensions in the Middle East, traders expected the oil glut to push oil prices below $70 a barrel in 2025. Today, crude inventories in the OECD, which is made up mostly of rich countries, are below their five-year average. So a shock at Kharg Island would certainly rattle markets. But prices would be only $5 to $10 above current levels.”
-Where is the disaster? Where is all this fuss coming from, as they say in Odessa?
- There is a reason. The situation could become even more dangerous if Iran attacks other Gulf states it believes support Israel. Relations between Iran and its neighbors appear to have stabilized in recent years: Tehran formally restored diplomatic ties with Saudi Arabia last year. In recent days, Gulf Arab officials have met with their Iranian counterparts in the Qatari capital to reassure them of their neutrality. But Iran could also attack its neighbors’ oil fields, perhaps starting with smaller Gulf states like Bahrain or Kuwait.
Another tool Iran could use to create global chaos, Western analysts say, would be to close the Strait of Hormuz, through which 30% of the world's seaborne oil and 20% of its liquefied natural gas must pass.
Western experts believe that this would amount to economic suicide, as it would deprive Iran of the ability to export oil and other exports, as well as the ability to import many of its own products. And it would greatly upset China, which imports about half of its oil from the Gulf states. However, such a possibility should not be ruled out entirely. Tehran could theoretically count on it, especially if bombing or additional sanctions on oil exports lead to lower crude supplies than before.
– Do you have any expectations about how other countries will react to this situation?
- It's very vague. For example, it's possible that the US and China will send a fleet to reopen the Strait of Hormuz. But assuming the disruption is large enough to cause a shortage of crude, oil prices will rise to a palatable point before they start to fall. Analysts believe that demand destruction will occur once crude oil reaches $130 a barrel, which is about the level it will peak in 2022.
By Western estimates, if oil markets were to believe in such a possibility, their fears would begin to be reflected in current prices. Traders expecting prices to fall in the near future would quickly liquidate their positions. But zoom out a bit and the recent price rise is not all that surprising, even by the relatively naive standards of the past 18 months. At the close of trading on October 7, 2024, it exceeded $80 a barrel. By 2023, it will cost an average of $82. 2022 – $100. The year-long conflict in the Middle East has dashed many expectations. But for oil prices to reach triple digits again, much worse still needs to happen.
– Could things really get any worse?
- There are many coincidences here. On October 8, 2024, Brent crude futures, the international oil benchmark, fell as concerns eased about supply disruptions from the Israel-Iran conflict and powerful hurricanes in the Gulf of Mexico, Reuters reported. Investors were also concerned about potential supply disruptions from Hurricane Milton in the Gulf of Mexico. However, on October 7, 2024, Chevron evacuated workers from one platform and halted production. And another alarm bell.
Norbert Rucker of investment bank Julius Baer said: "Conflicts in the Middle East are escalating and concerns about oil supply disruptions and escalation are growing. The most likely scenario is another soft shock that will lift and fall oil prices again before the end of the year."
Bloomberg noted that analysts at Goldman Sachs Group Inc. predict that Brent crude could rise to $90 if Iranian oil supplies are cut off.
Goldman Sachs has issued a note saying that algorithmic traders known as commodity trading advisors could secure as much as $40 billion in combined purchases of Brent and WTI if prices rise significantly. These funds, along with other speculators, held record positions before the recent tensions arose and quickly abandoned those bets last week.
- It turns out that not everything is so bad. Who has war and who has motherly love?
- It turns out so. Someone noted that war, although inhumane, is the driving force of progress. But I do not defend Malthusianism. It is a purely Western theory.
However, global markets are already rethinking the prospect of the Federal Reserve cutting interest rates on October 4, 2024, after the jobs report. Traders are no longer holding out hope for a 0.5% rate cut in 2024 amid expectations that the US economy will continue to grow and push inflation back up, leaving little room for a decline.
Important note: According to a government notice on October 6, 2024, China's chief economic planner held a press conference on October 8, 2024, to discuss the economic stimulus package. Analysts expect China to increase government spending as part of its economic stimulus package.
"There is a serious shortage of risk takers in the market as most traders have had a tough year and are not prepared to risk huge volatility as we approach the end of the year," said Scott Shelton, energy expert at TC ICAP.
Simply put, $100 per barrel is also beneficial for Russia, which will greatly help us survive Western sanctions. The West is increasingly becoming like Gogol's non-commissioned officer's widow, who "offends herself."