Photo Source: https://www.efchina.org/Blog-en/blog-20220526-en

Introduction

The escalation of hostilities between Hamas and Israel, that reached a tipping point on the 7^th of October, 2023, risks attracting supporters into a larger clash, with possible consequences on global economic and political stability.

The context of this acute conflict is relatively complex, hence only a brief list of major events with global impact will be listed in this section. If Fall of the Berlin Wall could have represented a major turn in history, subsequent conflicts from Eastern Europe and NATO’s war against Yugoslavia can be eventually considered a possible outcome of Soviet Union’s dissolution. The next major set of developments consisted of the invasion of Afghanistan and Iraq by the US and their allies in 2001 and 2003 respectively. In 2008, a major crisis in the American financial sector spread around the world. Amid a major conflict that debuted in Syria in 2011, and NATO bombing of Libya in the same year, American finances did not appear to fundamentally improve: national dept increased, financial risks as well, and after the COVID pandemic both inflation and risks of deflation became mainstream discussion topics. Inflation in many countries around the world appears to have been further accelerated by the conflict from Ukraine and the replacement of the EU’s cheaper gas imports from the Russian Federation with much more expensive Liquified Natural Gas (LNG).

In terms of global energy supply, at least two significant medium-term trends can be observed: major oil suppliers like Saudi Arabia, Iraq and Russian Federation are shifting their market focus towards Asia, while the EU is trying to shift towards both non-Russian natural gas and renewable energy in what appears to be a risky bet. The shift towards LNG in the EU has emerged after a period in which Germany had had a very competitive posture, as one of the top three exporters in the world. Furthermore, previous dependency of the US on Saudi oil imports, that peaked at 60 % in 2006, has gradually decreased as the US began to ramp up its internal production of oil and gas. As such, in 2015 the US became the largest producer of natural gas in the world (McLean, 2018). However, this growth relied also on fracking, which implied higher costs and implicitly less competitiveness. As such, fracking companies were depending very much on global oil and gas prices and often faced difficulties in maintaining operations profitable. Although the transition towards renewables is underway, national security of superpowers like the US may still rely on hydrocarbon economics for at least a couple of decades ahead. Hence, maintaining this strategic industrial field in good shape might represent a key priority for the US. Not even the US is pivoting back to renewed increases in oil and gas production, but European companies also continue investing in new projects.

The landscape of oil and gas production in 2022 is dominated by the US. The largest oil producers in the world in 2022 are presented in the table below.

Table 1. Largest oil producers in the world in 2022 and their market share (Energy Insitute, 2023).

State	Production [millions of barrels per day]	Global market share in 2022 [%]
USA	17.77	18.9
Saudi Arabia	12.136	12.9
Russian Federation	11.202	11.9
Canada	5.576	5.9
Iraq	4.52	4.8
China	4.11	4.4
UAE	4.02	4.3
Iran	3.822	4.1
Brazil	3.107	3.3
Kuwait	3.028	3.2
Mexico	1.944	2.1
Qatar	1.768	1.9

Similarly, the US comes into second place in terms of LNG production, as presented in the figure below.

Figure 1. Global LNG trade in 2022 among top 10 producers and consumers (International Gas Union, 2023)[1].

The graphic above identifies Australia, the US, Qatar, and Russia as major natural LNG producers. At the same time, while among the biggest LNG importers in 2022 were Japan, China, Republic of Korea, France, and Spain among others. The American LNG exports headed predominantly to Europe in 2022, according to the representation above.

There are two main hints in the primary data on global oil and gas production: firstly, the world is not ready yet for a steep reduction of hydrocarbon consumption on short term if one considers the production levels of top suppliers, and secondly, the Middle East and especially the Persian Gulf region remain vital suppliers of oil and gas.

In a further note, it worth to be added that an increasing number of African countries discover oil and gas reserves. Like in the cases of Libya, Iraq, Venezuela, Syria, security risks increase when these countries do not rally behind superpowers able to defend them against unconventional threats, or direct military attack. From this perspective the world still find itself in the era of oil and gas wars.

Energy supply disruption risks associated to Hamas-Israel conflict 

It must be mentioned that in the case of a successful Israeli invasion of Northern part of Gaza Strip, Israel may gain access to more natural gas, potentially present in this region’s maritime economic area.

As the camps are building up around Israel and (the Palestinians rather than) Hamas, the most visible indirect escalation is the one between Iran and Israel/USA/UK. There is a long background of tensions between these power poles, especially (except for the not-too-distant common history between these states) due to the failure to uphold JCPOA deal between P5+1 and Iran and the renewed sanctions imposed against the latter.

One of the highest risks associated to a conflict with Iran concerns the closure of the Hormuz Strait. Although not mentioned by Iran anymore, obviously due to the improvement in relations with Saudi Arabia. This closure has the potential to block at least temporarily the oil exports of Saudi Arabia, UAE, Kuwait, which represent 25.2 % of global oil exports share. Likewise, a potential blockade of Qatar’s LNG exports, one of the top three exporters with almost the same market share of the US and Australia, can impact the markets in a significant manner. There are however two important aspects that should be considered related to this risk: except the European interests in oil from these countries and Qatari LNG (approximately 25 % from total LNG exports of Qatar went to Europe according to estimations – which became attractive due to high prices), there is no significant American direct interest in (purchasing) these products nowadays. Hence, the US presence in this region has become less justified on the one hand, and the interest of Asian economic powers like China, Japan, and Republic of Korea to maintain security on this shipping lane is much higher than those of Europe and the US on the other hand. The perspective of this assessment is however from a supply perspective. If one considers that large oil and gas production companies present in the area may require armed state support, then the risk of escalation between Iran and the allies mentioned above remains high.

The second risk associated to the escalation among these camps can result in partial or total maritime blockades around the conflict zone. In this sense, the Arabia Sea, Red Sea, or South-East Mediterranean areas may experience increased clandestine or even (state) military maneuvers resulting in perturbation of important energy supplies. It must be considered though, that North-Eastern Mediterranean region, in which Türkiye maintains a strong presence and Russia will probably avoid direct confrontations (Syrian shores), may be less vulnerable to disruptions due to this conflict.

An S&P Global report citing International Energy Agency mentioned on the 10^th of October that the order of Israeli authorities for Chevron to shut down the Tamar platform will impact Egyptian LNG exports (S&P Global, 2023). While this may well be the case, it must be mentioned that Egyptian gas exports were already decreasing before the conflict, as internal demand grew, and the overall value of its LNG exports, that stood at approx. $ 8 bln. in 2022 (Anadolu Agency, 2022) is relatively lower than Qatar’s estimated $ 51.9 bln. for the same period (Reuters, 2023).

Egypt’s gas exports last year were relatively significant, but associating a possible decrease only with the conflict has the potential to create confusion. Given the fundamentally expensive LNG supply to Europe from any source, Egypt’s decreasing exports have less potential to significantly impact this market.

In the context of generally high LNG prices, a Financial Times report was noting that the EU was importing record volumes of Russian liquefied gas (Hancock & Tani, 2023), with Belgium and Spain leading the top importers.

Other significant oil and gas developments encompass the swap deal between Iraq and Iran, according to which Iran delivers gas to Iraq for electrical energy production, the discovery of natural gas in Türkiye’s Black Sea economic zone and the Turkish attempt to become of energy hub between Central Asia and Europe.

A recent National News (Emirati publication) article was concerned with the threat posed by drones to the critical energy infrastructure, especially in the context of Hamas-Israeli conflict (Mills, 2023). While this is a legitimate concern, the threat is not new at all: drones attacked Saudi Aramco back in 2019 and a 2022 Insider report mentions that drones were spotted near offshore installations before Nord Stream attack (Dean, 2022).

Besides Nord Stream missing gas volume, the EU faces further risk of supply decrease, as the Finland-Estonia pipeline was recently damaged. The cause of the leak as in other mysterious cases is not known yet.

Conclusion

Current article analyzed potential risks related to the energy supplies posed by the Hamas-Israeli conflict. While imminent risks exist, the EU finds itself anyway in a difficult position from the energy imports perspective and the latest discoveries of gas and oil from the Mediterranean region have a lower potential to impact global markets at this moment. Should anyone want to save the EU from slipping into chronic lack of competitiveness, these could only be major suppliers like the US or OPEC+.

The imminent threats of the Hamas-Israel conflict escalation can refer to blocking the Hormuz Strait or disruption of energy transportation in regions close to the conflict area.

In the light of recent events, the EU might want to continue decoupling itself from Russian gas and oil, but reconsidering relations with any pipeline that brings cheaper gas or oil has the potential to increase its survival chances in a China-driven economic race.

Bibliography

McLean, B. (2018, August 30). How America’s ‘most reckless’ billionaire created the fracking boom. Retrieved from The Guardian: https://www.theguardian.com/news/2018/aug/30/how-the-us-fracking-boom-almost-fell-apart

Energy Insitute. (2023). Statistical review of World Energy, 72nd edition. https://www.energyinst.org/statistical-review: Energy Institite.

International Gas Union. (2023). 2023 World LNG report. https://www.igu.org/resources/lng2023-world-lng-report/: International Gas Union.

S&P Global. (2023, October 10). Loss of Tamar gas supplies from Israel to impact Egyptian LNG exports: IEA. Retrieved from S&P Global: https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/natural-gas/101023-loss-of-tamar-gas-supplies-from-israel-to-impact-egyptian-lng-exports-iea

Reuters. (2023, July 18). Qatar Energy’s 2022 profit surges to $42.5 billion. Retrieved from Reuters: https://www.reuters.com/business/energy/qatar-energy-reports-58-jump-annual-profit-2022-4247-billion-2023-07-18/

Anadolu Agency. (2022, December 28). Egypt’s natural gas exports climb to $8.4B in 2022. Retrieved from Anadolu Agency Energy: https://www.aa.com.tr/en/energy/middle-eastafrica/egypt-s-natural-gas-exports-climb-to-84b-in-2022/37220

Hancock, A., & Tani, S. (2023, August 30). EU imports record volumes of liquefied natural gas from Russia. Retrieved from Financial Times: https://www.ft.com/content/1e70ff72-52d8-46b6-a8f4-fcc86fb88a6d

Mills, R. (2023, October 16). Why drones pose a new threat to critical energy infrastructure. Retrieved from The National News: https://www.thenationalnews.com/business/comment/2023/10/16/why-drones-pose-a-new-threat-to-critical-energy-infrastructure/

Dean, G. (2022, September 30). Unidentified drones were spotted near offshore installations days before Nord Stream attack, according to letter from Norwegian energy security agency. Retrieved from Insider: https://www.businessinsider.com/nord-stream-pipeline-attack-unidentified-drones-norway-offshore-energy-russia-2022-9?r=US&IR=T

[1] The image was retrieved in original from the cited source.