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Following Iran’s missile attacks on Israel,Ěýand amid the backdrop of Tel Aviv’s year-long war on Gaza and theĚýrecent ground invasion of Lebanon, global concern is rising about the possibility of an all-out war in the Middle East.

A lot now depends on Israel’s response to Tehran’s salvo of ballistic missiles in early October, with possible targets for any counterstrike likely to include Iranian oil facilities, nuclear sites, or energy infrastructure.

Amid much speculation, nothing is yet known about the nature or timing of Israel’s response, but global oil prices have already soared around since Iran’s missile strike. This was the biggest weekly gain since March 2023.

US President Joe Biden has Tel Aviv to desist from hitting oil facilities in Iran, the seventh largest oil producer in the world, but there are no visible signs of de-escalation as yet. In the past, there were large-scale energy price hikes following the Arab oil embargo in 1973 and the Islamic Revolution in 1979.

If the crisis can’t be contained, what impact will it have on oil prices and the global economy?

Israeli strikes on Iranian oilfields

Since Iran produces only around barrels of oil per day, any strikes on its oil assets may not have a major impact on global markets as members of OPEC+ and allied producers have enough oil reserves.

According to estimates, OPEC + has more than five million barrels per day (Mb/d) of spare capacity. Amrita Sen, co-founder of consultancy Energy Aspects, told that, “In theory, if we lost all Iranian production - which is not our base case - OPEC+ has enough spare capacity to make up for the shock”.

Nowadays, the oil market has new intelligence tools like satellite surveillance and tanker trackers to provide real-time data to avoid and price stability.

Meanwhile, Iran's crude oil exports have dramatically since its 1 October missile attack on Israel. Fearing retaliation on its oil assets, Iran has reduced its exports to 600,000 barrels per day, just a third of the volume of recent months.

Nevertheless, some panic can be expected, depending on the extent of damage, and the Iranian public may experience more gasoline shortages compared to other countries and the global market.

, an analyst at FINRA in Washington, told °®Âţµş that the impact of any Israeli attack on Iran’s oil production facilities would in all likelihood lead to “a short-term jump in the price of oil as Iranian production would either be severely curtailed or shut down for a period of time”.

However, Shah added that the price increase would be temporary at most “as both the Saudis and the US have enough spare capacity to cover any shortfalls” arising from Iran’s absence from the oil market.

Effect on the Chinese economy

China is Iran’s largest oil importer, buying of its exports. Sanctions on Iran have greatly reduced its reach, even though it is a large oil-producing country, so these exports are a lifeline for Iran’s economy. The $2 billion a month it makes from oil sales to China represent at least five percent of its entire economic output.

But any Israeli attack on Iranian oil facilities may not cause a huge upset for Beijing, as it also imports oil from Russia, Kuwait, Saudi Arabia, and Angola, and Iran’s exports cover just 15 percent of its needs. Therefore, global prices may not see a sharp increase.

“With China’s demand on the soft side at this time and China buying from Russia as well, if Iran were to stop exporting some of its 1.5 million barrels/day for a few months, on balance prices will not rise substantially from these levels on a global level considering that the United States is now a net exporter of oil as well,” , a senior geopolitical analyst, told °®Âţµş.

Discussing the reasons for a reduction in oil demand from a major consumer like Beijing, Shah said that the slowing of China’s economy and the increasing use of electric vehicles were all factors that would not indicate high oil prices over a significant period.

However, any major disruption in shipping routes, such as a blockade of the Strait of Hormuz, may cause some alarm for Beijing.

To prevent such a worst-case scenario, the agreement between Saudi Arabia and Iran mediated by ChinaĚýlast year may come in handy, as it could help in improving regional unity and security, and also ensure Beijing’s energy security.

In fact, in a proactive move, most Gulf Cooperation Council (GCC) states have recently assured Tehran that they would not facilitate any attacks on Iran to avoid complications in the Strait of Hormuz.

What the global market dreads the most is Iran retaliating to any Israeli attack by blocking the Strait of Hormuz, a key access point for oil shipping, already affected adversely by the threat of Houthi attacks.

Almost 20 percent of global oil supplies from Saudi Arabia, Kuwait, and the UAE (the holders of spare capacity oil according to from Wood Mackenzie) would be unable to be shipped if this happened, and prices could shoot up to per barrel. Some analysts even think that prices could hit more than per barrel in the event of this happening.

The Hormuz Strait is also used for gas exports as well, and Qatar, one of the world’s biggest producers of natural gas, transports almost through this chokepoint to Asia and Europe.

Impact on the global economy

If an all-out war in the region does take place, safe-haven assets such as gold and the US dollar could surge along with oil prices, sending shock waves throughout the global economy. A major disruption could be averted though, as there is less reliance on fossil fuels and the US has also become a .

Speculating over whether the Israelis would actually launch a counterstrike on Iranian oil facilities, Shah said that it is difficult to predict.

“The Israelis have so far not heeded any persuasion from the US with regard to its actions in Gaza and now Lebanon, so one should not completely rule out the possibility that Israel would want to strike hard at key Iranian non-nuclear assets and facilities which would include its oil production facilities,” he told TNA.

According to Shah, the main beneficiaries of high oil prices would be the Saudis and other Gulf Arab states as well as the US oil giants. But the most important beneficiary would be Russia as an increase in oil prices would provide it with more hard currency to continue to finance its war with Ukraine.

The main losers in such a scenario would be oil-consuming countries such as Pakistan and Bangladesh, where a sudden increase in oil prices could have a severe impact on their fragile economic situations.

Impact on the US elections

Indirectly, any spike in oil prices as a result of Iranian and Israeli attacks on each other’s energy infrastructure could impact the US election in November, as oil prices often count as an important economic indicator.

Though the US president does not necessarily have any influence over gasoline prices, it still affects approval ratings, and with less than a month left to the election, it could cause an upset.

"Just before the US elections, the White House is expending its utmost diplomatic effort to avoid a spike in oil prices at the gas pump for the American public, which itself can sway US election results,” Farhadi, a senior geopolitical analyst, said.

Though uncertainty prevails right now, Neil Quilliam, an energy policy and geopolitics expert at London’s Chatham House think-tank, told RFE/RL that it is more likely that Israel would strike targets that will “hurt the Iranian regime and ” rather than impact global oil markets.

If this happens, oil prices may decrease further if nothing serious takes place, but in the long term, the danger of an expanded war in the Middle East may keep the market on edge for the next few weeks, and months, at least.

Sabena Siddiqui is a foreign affairs journalist, lawyer and geopolitical analyst specialising in modern China, the Belt and Road Initiative, the Middle East, and South Asia.Ěý

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