With oil & gas markets on tenterhooks in the wake of the Israel-Palestine war, is a reinvigorated push for clean energy coming?

As the conflict between Israel and Palestine rages on and the death toll keeps rising, global markets, especially oil and gas ones, are already rattled with many outlining the potential impacts of this war, since Brent crude oil prices are sporting a 5% increase. While these impacts are bound to be limited, a further spike along with a disruption of oil supplies are believed to be on the cards if Iran joins the fray. On the other hand, some have pointed out that the worsening political instability in the Middle East could leave its mark on gas prices and spur a greater zest for the transition to green energy.

It is often said that hundreds of years of negotiations are better than a single day of war but sadly there are always those who do not appreciate the truth behind these words. However, the unresolved issues between Israel and Palestine are widely known and while an all-out war was not being wagged, the belligerence was left simmering and getting more pronounced with multiple incidents fueling political tensions between the two countries, like a powder keg waiting to explode. With provocations springing up left and right, it was only a matter of time before the war would reignite between Israel and Palestine, so the rekindling of the conflict does not really come as a surprise, despite what some analysts may say.

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While the Israeli intelligence’s failure to recognize the signs and get the intel about Hamas’ planned attack beforehand is rather surprising, considering Mossad’s vast network, we will not dwell on this further and will focus on the potential impact of this conflict on the oil and gas markets. Previously, Iran hinted at the possibility of closing the Strait of Hormuz, which is a narrow waterway that connects the Persian Gulf to the Gulf of Oman and the Arabian Sea.

This is perceived to be one of the most strategically important oil chokepoints in the world due to its location and the amount of oil that is shipped through it, as 30-40% of the world’s seaborne-traded crude oil passes through it every day. If Iran gets pulled into the war between Israel and Palestine, experts warn that closing the Strait of Hormuz may be one of the moves the country will make.

In May 2023, the United States (U.S.) already set the wheels into motion to bolster naval patrols in and around the Strait of Hormuz in the Middle East on a mission to address the growing threat to commercial shipping and put a stop to vessel seizures, after Iran reportedly confiscating a third oil tanker in the Persian Gulf in a matter of weeks.

Recent developments indicate that the U.S. is turning up the heat on Iranian oil exports, which is bound to ratchet the already heightened tensions between the two nations to a whole new level. Many experts have pointed out that Israel and Palestine are not among the top oil players, thus, no significant impact on crude oil supply and production is expected at this point.

Despite this, a potential plot twist cannot be excluded since the war between Palestine and Israel is happening in one of the key oil-producing regions, where Iran plays an important part. The accusations being laid at Iran’s door about its involvement in Hamas’ attack on Israel are not proven, but bearing in mind that Iran is a known supporter of Hamas, the global oil market is on high alert, waiting with bated breath to see how the situation will unfold in the Middle East. The further escalation of this war with more countries entering the conflict, has the potential not only to push oil prices up but also to put energy flows in the region at risk.

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Pierre Andurand, Hedge Fund manager specializing in energy derivatives, outlined: “As the Levant is not a large oil-producing region, it is unlikely to impact oil supply in the short term. And therefore one should not expect a large oil price spike in the coming days. But it could eventually have an impact on supply and prices. Global oil inventories are low, and the Saudi and Russian production cuts will lead to more inventory draws over the next few months. The market will eventually have to beg for more Saudi supply, which I believe, will not happen sub $110 Brent.

“Now, over the last six months, we have seen a very large increase in Iranian supply due to weak enforcement of sanctions. As Iran is also behind Hamas’ attacks on Israel, there is a good probability that the U.S. administration will start enforcing those sanctions on Iranian oil exports more tightly. That would further tighten the oil market. Also, the probability that this will lead to direct conflict with Iran is not zero.”

The oil market prices have been on a downward spiral lately due to concerns over the state of the global economy, despite the jump in prices toward $100/b in June when output cut pledges by Saudi Arabia and Russia made the headlines. Only days prior to Hamas’ attack on Israel, both countries confirmed intentions to continue to restrict supply by 1 million b/d and 300,000 b/d, respectively, through December 2023.

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As Hamas has urged Palestinians and other Arabs to join their ranks and “sweep away the [Israeli] occupation,” reports have already surfaced of another Iran-backed militant group, the Lebanon-based Hezbollah, firing missiles and artillery at three sites in the Israeli-controlled Golan Heights. If Iran ends up being dragged into the conflict, the energy market watchers are concerned about further investments in the region’s energy sector and the impact this will have on prices.

The rekindled conflict between Israel and Palestine, which started on October 7, 2023, during a major Jewish holiday, threatens upstream energy investments in Israel, as investors may pull out due to safety concerns if this conflict continues over a longer stretch of time. However, this is just speculation and no moves have been made yet to undermine existing investments, which have recently centered on the development of the country’s Mediterranean natural gas fields.

One of the companies which has invested in the development of Israel’s gas resources is Chevron. The U.S. giant announced two days ago that it would keep working in line with instructions from Israel’s energy ministry when it comes to its operated Tamar and Leviathan offshore gas fields. Conflicts in the region have previously led to the shutdown of the Tamar platform. This conflict has also forced the oil major to do the same once again.

Israel’s energy ministry justified the move by explaining: “In the wake of the situation, Israel’s defense establishment ordered the temporary suspension of natural gas supplies from the Tamar field. The economy’s energy needs will be supplied by alternative fuels. The power industry is preparing to use alternative fuels to power its stations.”

The Tamar platform, located some 25 kilometers off Ashdod in the Mediterranean, is said to be within range of rocket fire from the Gaza Strip. It remains to be seen whether Israel’s largest offshore gas field, Leviathan, which continues to operate normally, will suffer the same fate as the Tamar field.

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The world is divided over Hamas’ attack on Israel. While the Arab world seems mostly united in saying that the attacks by Hamas came about because of crimes Israel committed against Palestine, holding the country responsible for the ongoing military escalation in Gaza, the West including the U.S., European Union, and the UK have condemned the indiscriminate violence.

Saudi Arabia, which has called for an immediate halt to the escalation, said that it had warned repeatedly about the dangers stemming from “continued occupation” and “the deprivation of the Palestinian people of their legitimate rights.” In contrast, Joe Biden, the current U.S. President, reiterated America’s “rock-solid and unwavering” support for Israel which was “under attack orchestrated by a terrorist organization.” After Hamas started its unprecedented attack by land, sea, and air, Israel retaliated with heavy bombing of Gaza, which ignited fears of a full-on ground invasion of Gaza.

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Taking a stand in support of Israel, most Western nations have emphasized the country’s right to defend itself against attacks but others indicate that Israel may use this as an opportunity to occupy the Gaza Strip, creating an even larger humanitarian and migrant crisis. Regardless of where one stands in the blame game, the loss of life needs to be condemned as the body count on both sides keeps growing, sparking fears of region-wide security repercussions.

While Benjamin Netanyahu, Israeli Prime Minister, promised to turn the besieged Palestinian enclave into a “deserted island,” the United Nations World Food Program (WFP) called on all parties to uphold the principles of humanitarian law and enable “safe and unimpeded” humanitarian access to affected areas. Meanwhile, India has also joined nations condemning the violence with Narendra Modi, the country’s Prime Minister, expressing solidarity with Israel.

Hardeep Singh Puri, India’s oil minister, commented: “As far as the energy sector is concerned, the place where the action is taking place is in many respects the center of global energy. We will watch very carefully. We will navigate our way through this. These kinds of uncertainties only encourage people to sustainable and cleaner fuel.”

Puri’s take on the potential impact of the latest conflict in the Middle East on the faster pivot from fossil fuels to low-carbon and green energy makes sense when one considers that the Ukraine crisis also put the wind in clean energy’s sails. While a boost in the global clean energy ante is probable, the speed of the decarbonization momentum and the transition to renewable and carbon-free sources of energy supply largely depend on the policies that countries decide to put forward. This is illustrated by the dichotomy between the energy policies proposed by the right-wing politicians and their left-wing counterparts.

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Even though the impact on the oil prices will most likely be limited unless the U.S. and Iran along with other supporters of both countries decide to get directly involved, the potential to widen the war between Israel and Palestine into regional hostilities should not be ignored, thus, measures need to be taken to stop this and put an end to the current conflict not just for the sake of global markets but primarily to preserve human life and halt further suffering for citizens in both countries.  

Meanwhile, OPEC has launched its 2023 World Oil Outlook (WOO) at the King Abdullah Petroleum Studies and Research Center (KAPSARC) in Saudi Arabia, offering a detailed review and assessment of the medium- and long-term prospects for the global oil and energy to 2045. Based on the latest WOO, global oil demand is predicted at 116 mb/d in 2045.

OPEC’s 2023 WOO, outlined: “Global primary energy demand is set to increase from around 291 million barrels of oil equivalent per day (mboe/d) in 2022 to close to 359 mboe/d in 2045, an increase of 68.3 mboe/d, or 23% over the outlook period. Growth is expected to slow gradually from the relatively high short-term rates to more modest long-term increments, in line with moderating population and economic growth.

“Energy demand growth will be driven by the non-OECD region, which is set to increase by 69 mboe/d over the outlook period. Around 28% of non-OECD growth is expected to come from India alone. At the same time, energy demand in OECD countries is set to marginally decline in the outlook period.”

This edition takes on board recent energy and economic-related developments, particularly related to the shifting dynamics around net-zero policies, with many populations questioning the targets and the benefits, policymakers reevaluating their approach to energy transition pathways, and new technologies being developed and deployed. In addition, the outlook underscores the need to bring modern energy services to billions that continue to go without.

Commenting on this, Haitham Al Ghais, OPEC Secretary General, remarked: “The upshot is there is no credible way to address all the challenges before us without utilizing all available energy sources, all relevant technologies, and with energy market stability as a cornerstone for the huge investments required. The WOO 2023 launch represents the culmination of many months of modeling, writing, review and production. It should be viewed as an insightful reference tool, one that underscores OPEC’s commitment to dialogue, knowledge-sharing and data transparency.”

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While the demand for all fuels is set to increase in the long term, with the exception of coal due to energy policy and climate commitments, the WOO predicts that the strongest growth is expected for renewables – primarily wind and solar – which will increase by 34.3 mboe/d. The share of other renewables in the energy mix is also set to rise from around 2.7% in 2022 to 11.7% in 2045.

Moreover, oil demand is estimated to grow, and even though its share in the energy mix will decline, it is expected to remain the fuel with the largest share by 2045 at 29.5%, despite the IEA’s predictions of peak oil demand by 2030.

Additionally, natural gas demand is set to increase by 20 mboe/d over OPEC’s outlook period, reaching 87 mboe/d in 2045. The share of fossil fuels in the energy mix is expected to drop from above 80% in 2022 to about 69% in 2045, due to the decline of coal. The WOO underlines that the combined share of oil and gas in the energy mix will still represent 54% in 2045.

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