Israel, Iran, And The Global Energy Tightrope

The long-simmering conflict between Iran and Israel erupted this weekend when Tehran launched a massive air strike against the Jewish state. Escalation continued as Israel conducted a strike on the Iranian city of Isfahan. Israeli military officials have described the attack as intentionally narrow, meant to demonstrate Israel’s capacity to strike inside Iran’s borders, and specifically, the Islamic Republic’s nuclear program. While this may signal the intention to limit escalation, and the attacks did not target any of the facilities, senior officials in Tehran had threatened to change Iran’s nuclear doctrine, which means acquiring nuclear weapons. This is signaling a further deterioration of U.S. and Israeli deterrence against the mullah regime supported by China and Russia.

Over 300 drones, cruise, and ballistic missiles were aimed at Israeli airspace on Saturday night, April 13, and early hours of Sunday the 14^th. This attack was not a surprise. President Biden warned days before the attack it would likely occur, and Iran itself stated as much after Israel allegedly bombed Iran’s Islamic Revolutionary Guard Corps command building in Damascus, killing senior IRGC generals. Iran ignored and violated the diplomatic immunity of the U.S. Embassy in Tehran and conducted a terror attack on the Israeli Embassy in Buenos Aires, Argentina.

Tehran ignored Biden’s call not to strike Israel. American deterrence in the Middle East and in the world is deteriorating. However, military power is not. Israel, her Arab neighbors, and Western allies conducted a sophisticated air defense operation, shooting down over 90 percent of the Iranian missiles. Israel’s multi-layered air defense system, including Arrow 2 and Arrow 3, and the famous Iron Dome which features defense technology from defense companies like Israel Aircraft Industries, Rafael, and Raytheon, performed with flying colors. But was it a loss for the Ayatollahs?

Iran, beset by frequent protests, felt that it could not afford to ignore an attack from Israel on an ostensibly diplomatic asset (the IRGC compound in Damascus was located next to the Iranian consulate). Yet, Tehran’s signaling allowed Israel and its U.S. Central Command allies to prepare and coordinate. Next time, such early warnings are likely not to be forthcoming.

Amina Hassouna, a seven-year-old Bedouin girl, was gravely injured, and seven people were treated for minor injuries. Israeli Air Force base Nevatim suffered some damage. Iran hastened to declare its mission objectives completed, having “successfully retaliated” against the “illegitimate Zionist regime”, while promising further action if Israel responds with attacks on Iranian territory.

President Biden told Israeli Prime Minister Benjamin Netanyahu to “take the win”, and that the US will not support an Israeli counterattack on Iran itself. Reportedly, the Israeli War Cabinet decided to retaliate, as no country can be expected to stay put after a massive attack against its territory is launched. The nature of the Israeli retaliation and Iranian reaction would define how events in the Middle East will develop.

A broader regional war in the Middle East is still possible. The ball is now with Benjamin Netanyahu, who must weigh if Israel is going ahead with a strike, the ensuing potential diplomatic isolation, and a global economic blowback. Netanyahu has unfinished business in Gaza, in the six-month war against Hamas, and in Lebanon, against Hezbollah, which continues to shell and rocket northern Israel, causing close to 100,000 people to have become internally displaced persons.

Any further escalation will have global impacts. Global economic insecurity due to massively climbing oil prices would hurt since any escalation may trigger an Iranian blockade of the Strait of Hormuz, a critical oil shipping passage that moved over a quarter of total global seaborne traded oil in 2022 and the first half of 2023. Iran demonstrated its willingness to act there when it seized a ship linked to Israel before it attacked.

This heightened risk of disruption to oil and natural gas supplies pushed oil prices even higher. As of April 13th, 2024, Brent oil was priced at $90.45 per barrel, and the Henry Hub natural gas index stood at a low of $1.77/MMBtu. Analysts predict these prices could surge dramatically, with some expecting oil to break the $100 per barrel mark if the conflict intensifies, even before the Strait of Hormuz is shut.

Arab states, in the process of normalizing relations with Israel, participated in the anti-air campaign, shooting down Iranian drones and missiles and opening their air space to Western and Israeli countermeasures. Arabs have tried to de-escalate tensions, with Saudi Arabia calling for “deliberation”. Such an act shows Arab fear of Iran and disinterest in escalation.

China's foreign ministry called for calm and de-escalation. Since China-brokered normalizing relations between Saudi Arabia and Iran in 2023, Beijing has sought to position itself as an equal to the United States and to guarantee low energy prices. Since China has inherited America’s status as the region’s largest oil purchaser, it has a lot of leverage to utilize. China also has every incentive: climbing energy prices would derail China’s fragile economy and its ambitions of global power.

The only global actor that benefits from climbing oil prices is Russia. No stock should be put in the boilerplate reaction from Russia calling for calm, as Russia is nearly alone amongst international actors in benefiting from this chaos. Russia is reliant on energy export revenue to fund its war in Ukraine and maintains close ties with Iran, which is producing drones for Russia to utilize against Ukraine. Iran’s attack was reportedly inspired by Russian battlefield tactics.

President Biden finds himself in an unenviable predicament. Globally, pressure against Russia and/or China runs the risk of either power retaliating by stoking conflict in the Middle East through Iran and her proxies. House dysfunction on aid to aid to Israel and Ukraine does nothing to help this.

Domestically, Biden’s efforts to de-escalate tensions are aimed at keeping oil prices down while his administration and its predecessors have failed to extirpate inflation. He cannot appear too soft on Israel as it alienates far-left voters and many Muslim Americans, while conservatives blame him for being too lax on Iran.

The U.S. is pressuring ally Israel to limit its defensive response in a broad regional conflict that is already simmering and is also encouraging nations like China, Turkey, and Saudi Arabia to exert similar pressures on Iran. Such international coordination is essential to maintain pressure on both Iran and Israel to prevent escalation. Juggling all these competing interests is anything but easy.

There is little room for error, since the Biden administration’s previous misstep stymieing LNG exports and prematurely selling off a significant portion of America’s Strategic Petroleum Reserve. The recent surge in crude oil prices undermines Biden's campaign by reminding Americans of inflation (even as it trends downward), while “Bidenomics” remains an underwhelming pitch to many.

This latest escalation of Middle East conflicts underscores the importance of energy geoeconomics and the changing nature of the international system. The path forward demands a delicate balancing act that requires deft diplomacy and strategic restraint to avert a descent into chaos. It also underscores how any peaceful resolution to this crisis will involve restoring American deterrence in the Middle East and the world.