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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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The New Global Oil Market Order Hangs In The Balance After Hamas Attacks Israel

  • Palestinian political and military organisation Hamas launched coordinated multi-pronged attacks by land, sea, and air against Israel last weekend.
  • The potential for the Hamas attacks on Israel to suck in other Arab states into the conflict, and for it to then become another proxy war could have major ramifications for a large number of countries.
  • Soaring oil prices as a result of renewed tensions in the Middle East could lead to economy-crippling levels of inflation in the West.

In what turned out to be extraordinary timing, October 3 saw a Western coalition of France’s TotalEnergies and Italy’s Eni, plus Qatar Energy, apply for the second licensing round on oil and gas blocks 8 and 10 in Lebanese waters, while only four days later Palestinian political and military organisation Hamas launched coordinated multi-pronged attacks by land, sea, and air against Israel. Lebanon is a core member of the Iran-dominated Shia Crescent of Power, which both China and Russia have long seen as the foundation stone for their expansion of power across the Middle East as a whole, as analysed in depth in my new book on the new global oil market order. Lebanon’s political and military organisation, Hezbollah – like its Palestinian counterpart Hamas – vows Israel’s destruction and praised Hamas for its “heroic operation” against Israel on October 7. Both paramilitary groups receive multi-layered support from Iran’s financial, intelligence, and military networks and each of these support facilities are inextricably linked to China and Russia, as also fully examined in my new book. The potential for the Hamas attacks on Israel to suck in other Arab states into the conflict, and for it to then become another proxy war - to add to that still raging in Ukraine - between the U.S. and Russia (and China) appears large. The last time that a major conflict between Israel and the Arab states occurred, the 1973 Oil Crisis erupted, which saw the benchmark WTI oil price shoot up around 267 percent - from about US$3 per barrel (pb) to around US$11 pb.

The West has long been looking to disrupt China and Russia’s increasing hold over the core Shia Crescent (comprising Lebanon, Jordan, Syria, Iraq, and Yemen) - as exercised through proxy Iran – and the expansion of its oil and gas activities in Lebanon can be regarded as part of that process. This is particularly the case now, as for many years the West has critically overlooked a key lever of power by which Russia and China have extended their own presence in the region – namely, the creeping roll-out of a massive pan-regional electricity power grid with Iran at its centre. Within the last two weeks, the International Energy Agency (IEA) stressed that such power grids are “poised to emerge as the ‘new oil’ of the global energy system,” and added that: “For all countries, speeding up permitting, extending and modernising electricity grids, addressing supply chain bottlenecks, and securely integrating variable renewables are critical.” Iran has long used Iraq – never under the scrutiny of U.S. sanctions as Iran has been – as a conduit for oil, gas, and electricity deals, as also detailed in my new book, as a means of expanding its levers of control over the Shia Crescent. Such deals allow not just for the installation of permanent infrastructure linking one country to another but also for the on-site presence of permanent ‘technical and security’ personnel, including Iranians, Chinese, and Russians. In just the same way that Russia’s huge level of gas supplies to Europe gave it immense power across that continent up until changes to that arrangement were made after the 2022 invasion of Ukraine, so Iran’s electricity and other power supplies give it enormous power over the Shia Crescent and increasingly the rest of the Middle East.

Related: OPEC Says Oil Industry Needs $14 Trillion Of Investment By 2045

It was no coincidence that just over a month after Israel and the United Arab Emirates (UAE) in August 2020 normalized relations (and then Israel, Bahrain and Morocco did the same), Iran’s own neo-client state, Iraq, signed new energy deals with core Shia Crescent countries, Jordan and Lebanon. In Jordan’s case, last October saw it sign a contract with Iraq to connect their electricity power grids. By extension, this provides a direct link between Jordan and Iran, as around the same time as Israel and the UAE had announced their normalised relations deal in August 2020, Iraq signed a two-year deal with Iran for electricity imports, the longest such deal between the two countries. Shortly after that, Iran’s Energy Minister Reza Ardakanian stated that Iran’s and Iraq’s power grids had become fully synchronised to provide electricity to both countries by dint of the new Amarah-Karkheh 400-KV transmission line. He added at the time that Iranian and Iraqi dispatching centres were fully connected in Baghdad, the power grids were seamlessly interlinked, and that Iran had signed a different three-year co-operation agreement with Iraq “to help the country’s power industry in different aspects”.

In Lebanon’s case, the most recent deal was the 22 July renewal of a longstanding agreement for Iraq to provide it with up to 2 million tons of crude oil for a year, plus additional supplies of fuel oil. According to official comments from Iraq’s Oil Ministry, the fuel oil would be sold at international prices and would be paid for in exchange for Lebanese goods and services. A more careful look at the deal reveals that it is anything but standard and straightforward. The first key point is that Iraq does not have any fuel oil at all that meets the specifications of any power plant anywhere in Lebanon. Indeed, Lebanon’s own caretaker Energy Minister, Raymond Ghajar, openly stated in February 2021 after an earlier renewal of the deal that: “Iraq’s heavy fuel does not match Lebanon’s specific needs.” Given this bewildering premise, Lebanon’s supposed plan at that point was to resell the Iraqi fuel and use the proceeds to buy spot cargoes of a fuel that did meet its specifications. The second key point is precisely what ‘goods and services’ Lebanon has been and will use to pay for this useless Iraqi fuel oil. Lebanon’s two most valuable exports are uncut diamonds and unwrought gold, despite it having no diamond mines and no gold having been mined anywhere in the country for years. It has a large trade in arms and ammunition as well.

On the other side of the equation, Iran has been under considerable financial pressure itself ever since the U.S.’s unilateral withdrawal from the ‘nuclear deal’ in May 2018. This has meant that Iran has been finding it increasingly difficult to pay its military proxies in the Shia Crescent countries, including Hamas in Palestine and Hezbollah in Lebanon, so this oil deal between Iraq and Lebanon may be regarded as one instrument in Iran arranging an effective method of continuing to fund these military proxies. In this scenario, oil would supposedly come from Iraq – although it is impossible to tell whether it is from Iraq or Iran as there are so many shared fields, as also detailed in my new book, then Lebanon sells it – at some point in the oil-gold/and or diamonds chain - for U.S. dollars. Lebanon then uses some of these dollars to buy fuel oil for its power stations and the rest to either pay Iran, via Iraq, U.S. dollars that Iran needs to pay its militias in Lebanon and Palestine and elsewhere or it pays the militias itself on Iran’s behalf.

Both TotalEnergies and Eni have been at the vanguard of the West’s efforts to establish a new foothold in the Middle East following the re-engagement of the U.S. after a period of focusing inwards. This was seen in practice in the U.S. withdrawal from, most notably, Syria (in 2019) – including protracted internal White House discussions about pulling out of the strategically vital At-Tanf exclusion zone that was the tri-border junction of Syria, Jordan, and Iraq - Afghanistan (2021), and Iraq (2021). In practical terms, though, this policy can be seen earlier in the U.S.’s withdrawal from the nuclear deal with Iran, which opened the door to a massive increase in influence from both Russia and China across the Middle East. An early indicator of whether the West’s efforts to regain any influence in the Shia Crescent have any chance of succeeding may come now from how TotalEnergies and Eni fare in their Lebanese energy plans. It may be, though, that the ongoing hostilities between Hamas and Israel inexorably begin to further destabilise the tinder box that is the present Middle East, leading to a second active region of proxy war between the U.S. and its allies on the one side, and the allies of China and Russia on the other, to add to the ongoing war in Ukraine. It seems likely that Beijing and Moscow might well believe that with two such conflicts in place, a third theatre of war in the world – in Asia Pacific, for example – would stretch the resources of the West, both military and politically, very close to breaking point. In any event, the likely soaring price of oil and gas from a broader Arab-Israeli conflict would send the West back into economy-crippling inflation levels.

By Simon Watkins for Oilprice.com

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Leave a comment
  • DoRight Deikins on October 09 2023 said:
    Don't forget a possible proxy conflict in the Caribbean between Venezuela and Guyana.
  • Mamdouh Salameh on October 09 2023 said:
    There is already an established global oil market order in place based on a triangle made up of Russia the global superpower of energy, China the world’s largest importer of crude oil and the driver of the global oil market and China’s and Russia’s allies in the Gulf region sitting on 48% of the world’s proven oil reserves.

    This oil order is supported by the BRICS group and the Shanghai Cooperation Organization (SCO) who between them account for more than 55%-60% of the global economy and growing.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

Leave a comment

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