Fight to the death: The world has to prepare for a Middle East energy storm
It has not yet targeted the vast oil terminal at Kharg Island, which accounts for 90 per cent of Iran's crude exports and essentially funds the clerico-military regime. Croft sees a clear and rising risk that Israel will cross this line, setting off a perilous chain reaction.
You could read market insouciance as evidence that oil no longer matters as much as we used to think. The 'oil intensity' of global GDP has fallen by 60 per cent since the energy crisis of the 1970s.
Right now, the world is awash with crude. Saudi Arabia and Gulf states have launched an undeclared price war against non-OPEC rivals – and OPEC cheaters – adding 400,000 barrels a day to supply each month at a time when the Trump-battered global economy is too weak to absorb it.
Behind this is a larger and relentless headwind for petrostates: China is moving with breathtaking speed to electrify its economy and end its reliance on seaborne fossil imports.
Electric vehicles already make half of all new cars sold in the world's largest car market. The trajectory is unstoppable and near vertical in historical time. It is spreading to trucks, and spreading across East Asia.
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This is the deeper reason why Saudi Arabia has stopped trying to prop up crude prices, and switched to chasing market share. But you can still have violent oil price spikes even within a structural bear market.
Iran's oil export revenues were $US53 billion ($82 billion) last year. Half goes directly to the military, funding nuclear enrichment, drone production and the missile forces of the Revolutionary Guard Corps.
The cardinal problem for Netanyahu is that he does not have the bunker-busting bomb – the Massive Ordnance Penetrator – the only weapon able to blow up the Fordow nuclear complex, built deep underground near Qom and beyond the strike-power of the Israeli air force.
It should be obvious by now that he will not stop until he has destroyed Iran's nuclear capability and crippled the regime beyond recovery. So unless he can knock out the Fordow site by other means, which will prove very difficult, the fallback strategy is to smash the Kharg Island facilities and squeeze the Iranian revenue stream until the pips squeak.
Iran has been shipping 1.5 million barrels per day despite Western sanctions, mostly smuggled to China in 'dark fleet' tankers with the full complicity of Beijing. This is up from near zero in 2022.
Saudi Arabia has enough spare capacity to offset the total loss of Iran's exports if need be. But an Israeli strike on Kharg Island would not end there. Iran's Revolutionary Guard has always threatened to shut the Strait of Hormuz, set off maximum energy havoc, and globalise the conflict, if their own oil export facilities are ever attacked.
Iran lacks the means to close the narrow chokepoint entirely, and its ships would risk annihilation by the US Fifth Fleet if it tried. But it can still cause chaos by launching pinprick attacks on tankers as it did in 2019, rendering commercial ships almost insurable. 'They could mine the Strait,' said Croft.
S&P Global Market Intelligence said the Iranian regime may lash out at energy infrastructure across the region as a final, desperate move once it depletes its missile stock and loses its main tool of leverage.
It might try to mobilise the Iraqi Shiite militias, such as the Kataib Hezbollah and the Popular Mobilisation Forces, to paralyse the Basra oil terminals – threatening up to 3.4 million barrels per day of exports.
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Iran does not want a parallel conflict with Sunni Arab states. It is already reeling from the loss of its strategic ally in Syria, and the decapitation of its Hezbollah proxies in Lebanon. It repaired ties with Saudi Arabia two years ago in a deal brokered by China.
Nor does it want to irritate China. But there are limits to forbearance if the regime is pushed to the wall. 'We do not think the Iranian leadership will prioritise keeping crude supplies steady to China over trying to ensure their own survival,' Croft said.
Oxford Economics said a full-blown oil crisis of this kind would push oil to $US130, and push both global and US inflation to 6 per cent.
It is China that now depends most on oil and LNG from the Gulf. America imports almost no fossil fuels from the region, except for a little Arabian heavy crude to balance its refineries. That shields the US from immediate supply risk, but not from a price shock. Arbitrage through the futures market instantly links US and global oil prices.
Petrol at the pump shoots up for Americans too in such a crisis. They drive twice as far as Britons or Germans on average, and their cars use 50 per cent more fuel per mile.
Donald Trump may conclude that it is better to join the war and drop his bunker-buster on Fordow rather than risk a cost of living shock on his watch. But that would create a far-reaching and dangerous situation of a different kind.
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