On July 24th, Prime Minister Benjamin Netanyahu spoke in Washington D.C. to a joint Congressional meeting about the Israel-Hamas War, specifically, defending how Israel has conducted themselves militarily. As the Israel-Hamas War enters its tenth month, the threat of a new front opening in Northern Israel with Hezbollah is higher than at any other point in the War. If the exchanges between Hezbollah and Israel, and Israel and Iran, do expand into a greater regional conflict, the impact on energy markets would be extensive due to Hezbollah’s relationship with Iran and the region’s influence on the oil and gas market.
Impact on Energy Markets
Accounting for approximately 31.3 percent of global oil production, the Middle East is, and will continue to be, strategically important for both American national security, and global energy markets. Throughout the Israel-Hamas War, shipping through the Red Sea has been heavily disrupted due to the continued Houthi attacks, the terrorist organization in Western Yemen who pledged support for Hamas. Their most recent attack occurred on July 22nd, 2024 when the Houthis launched an Iranian made long-range drone at Tel-Aviv. The continued attacks in the Red Sea have resulted in many shipping companies choosing to sail around the Cape of Good Hope instead of through the Suez Canal and the Red Sea – this adds approximately 9 days of time at sea depending on the size of the vessel sailing from Europe to Asia. With further disruptions in shipping, and the rising threat of oil and gas production to be impacted due to rising tensions between Israel and Iran, global energy markets, and commerce in general, stands to be severely negatively affected.
Eight Countries Interconnection Project Will be Further Delayed
First beginning in 1988, the Eight Countries Interconnection Project was proposed by Egypt to connect their electricity grid to transmission lines in the participating countries – the original participants were Egypt, Syria, Iraq, Jordan, and Turkey. The initial phase of the project required all participating countries to commit to upgrading their electrical grids to annual minimum standards as part of the goal of establishing a general trading agreement centered on sending surplus electricity to member nations in the case of an energy deficit. Over time, the list has expanded to include Libya, Lebanon, and the Palestinian territories (Gaza and West Bank). As of today, the project is still under development and as conflict continues, with Lebanon being poised to be severely impacted by a possible Israel-Hezbollah War, and continued conflict and uncertainty occurring in Syria, both delays in construction and existing agreements may be challenged – this will further impact the project’s objective to establish the region as a global energy hub as well as put millions at risk of having no reliable source of electricity.
The Arab Pipeline Project
First proposed in 2003, the Arab Pipeline, was developed to increase ease of access from regional participants to surplus natural gas made plentiful by discoveries offshore in the Eastern Mediterranean. The original members were Egypt, Syria, Iraq, Jordan, Lebanon, and Turkey, with long-term goals of eventually providing natural gas via pipelines through Turkey to European consumers.
With frequent obstacles coming from an unstable Syria and Iraq, the project, although mostly completed, has been plagued with challenges ranging from terrorist attacks sabotaging the pipeline to domestic production challenges including excessive heat and grid obstacles in Egypt preventing exportation of much needed gas. Israel also participates in the pipeline, providing additional geopolitical challenges since Israel has tense relations with Syria and Lebanon. As a result of the Israel-Hamas War as well as ongoing territorial disputes regarding exclusive economic zones in the Levant Basin, any resources off the Gazan coast remain inaccessible and there isn’t any incentive for economic investment into resource extraction until tensions subside and territorial claims are agreed upon.
Iranian Involvement and Regional Expansion
On July 31st, Israel conducted an attack targeting Hamas leader Ismail Haniyeh who was attending the inauguration of the new Iranian president, Masoud Pezeshkian, in Tehran. The attack comes the day after Israel launched a retaliatory strike targeting Hezbollah Senior Commander, Fuad Shukr, in Beirut, Lebanon. Those actions were met with Iran claiming that, “revenge is our duty.” With these attacks comes a heightened fear that the Israel-Hamas War, contained as best as possible until now, will expand into a deadly, and highly disruptive, regional war involving conventional state militaries.
Iran may respond with a combination of military and economic resources. Previously, Iran launched over 300 drones and missiles toward Israel, in response to the Israeli attack on the Iranian Consulate Annex Building in Damascus, Syria, which killed Brigadier General Mohammad Reza Zahedi, a senior Quds Force commander of the Islamic Revolutionary Guard Corps (IRGC). Given the scale of the Iranian response to the attack in Syria, and the recent attack having taken place in Tehran, the capital of Iran, a far greater military retaliation is highly probable. Such a response may also include simultaneous attacks from the remaining forces of Hamas and a well-prepared Hezbollah – both being proxy forces of Iran.
While Israel does have gas production in the Eastern Mediterranean, Israeli production does not contribute significantly to the global oil and gas market. Therefore any attack on Israel’s Leviathan field, the largest of the three Israeli fields, won’t have a significant effect on the global market – although an attack wouldn’t be entirely out of the question given the drones Hezbollah has in their possession. To advocate for, or force, harsher condemnation by neighboring Arab states, as well as non-regional stakeholders, Iran could blockade the Strait of Hormuz, which facilitates the transport of 21 million barrels of oil per day, which accounts for 21 percent of global petroleum consumption – significant portions of which go to China, India, South Korea, and Japan. The Strait also accounts for over one-quarter of oil traded via sea lanes, and approximately one-fifth of the global liquified natural gas trade. Combined with the continued Houthi attacks in the Red Sea, and the ease by which Iran could initiate naval harassment of all shipping traffic in the Strait of Hormuz, the strategic importance of the Strait cannot be understated. The impact the Strait’s closure, or constraint, would have on the global market for oil and gas would reverberate globally due to the significant amount of manufacturing that takes place in the potentially impacted East Asian nations.
Conclusion
The recent Israeli strikes in Beirut and Tehran have opened the door to the possibility of an expanded regional conflict. Coming out of the Israel-Hamas War, Iranian support of Hamas, Hezbollah, and the Houthis, and the recent Israeli retaliatory strikes, puts the region on a precarious path toward significant conflict. The impact of an expansive regional war has the potential to be disruptive to global energy markets due to the extensive amount of oil and gas that the region both produces and facilitates the trade of via the Red Sea and the Strait of Hormuz. With the precarious state of the Middle East, and while diplomatic efforts work to diffuse the situation, domestic sources of energy should be explored as this conflict highlights the importance of domestic energy independence and security.
