Iran and Israel trade blows on energy infrastructure

The war between Iran and Israel continues, with the consequences likely to be significant

What: Iran continues to be attacked by Israel, with both countries hitting each other’s energy infrastructure.

Why: Israel aims to halt Iran’s progress on a nuclear weapon and enact regime change.

What next: Although Iran has signalled willingness to negotiate, the US has hinted it may get involved in the war.

The conflict between Israel and Iran expanded to include energy infrastructure this week, with both countries launching missiles at fuel storage depots, refineries and gas facilities in a bid to harm the opposite side’s ability to wage war.

The war threatens to upend the world economy, particularly if Iran chooses to move ahead with the nuclear option by shutting down the Strait of Hormuz – a vital shipping lane.

Insurance broker Marsh McLennan told the Financial Times that insurance prices for ships transiting the strait had climbed to more than 60% since the start of the conflict, with hull and machinery insurance for ships passing through increasing by 0.125% of the value of the ship to around 0.2%. This pushed the cost to cover a vessel worth $100mn from $125,000 to $200,000, the Financial Times noted.

Regarding increased hostility in the area, Marcus Baker, global head of marine and cargo insurance at Marsh McLennan told the Financial Times that “We’ve not yet seen a missile fired at a ship in the Arabian Gulf, so what it represents is the market saying, look, there’s definitely a heightened level of concern about the safety of shipping in the region”. He added that prices could continue to rise. Speaking to NewsBase, Douglas McDonald, a commodities analyst at consultancy IGM Energy, similarly cautioned: “Hormuz is a key waterway, and, just as we have seen in the wake of Iranian threats to close it, any military measures that could impair crude, product and LNG flows through the strait could result in an immediate spike in commodity prices”.

Energy attacks

Israel’s choice to attack Iran has placed the latter in a difficult position, with Tehran’s energy sector remaining relatively vulnerable.

Refineries have been critical in maintaining a supply a fuel and export revenue while Iran continues to struggle against the weight of sanctions, and due to their nature, they have become easy targets for Israeli bombs.

Targets hit include two natural-gas facilities at the South Pars field in the Persian Gulf – which were hit by Israeli drones – and a refinery in Haifa, north of Tel Aviv. This attack damaged pipelines and forced the facility to enact a partial shutdown, according to the refinery’s operator and the Wall Street Journal.

Israel then proceeded to hit back with a strike on Tehran’s central oil refinery and main fuel depot which caused a large fire that was put out on June 15.

More worryingly, since the conflict began, exports from Iran’s Kharg Island terminal – from which Iran ships more than 90% of its oil – seem to have been stopped completely since June 13, with no tankers anchored at Kharg Island at all since June 16, according to LSEG satellite ship tracking data provided by Reuters.

Despite this, Iran could still feasibly continue to sell oil for a few weeks, with the country having stored 27.5mn barrels in takers outside the Gulf, according to Kpler data. This would be good news for countries such as China, which is currently the main buyer of Iranian product.

Despite Iran taking most of the hits, Israel hasn’t gotten off lightly – with its energy infrastructure also having been affected by retaliatory strikes. On June 13, the country closed two of its three offshore natural gas fields – the Chevron-run Leviathan field and the Energean-run Karish field. This has reduced Israel’s supply by around two-thirds despite the continued operation of its Tamar field. With this, Israel will need to switch to coal and fuel oil to substitute the lack of gas in its power plants, according to Reuters.

Supply outages due to the gas shortages have impacted Israel’s own gas exports – most of which are exported to countries like Jordan and Egypt. Indeed, since the strikes, Egypt and Jordan both reported that they were suffering natural-gas disruptions and were seeking alternative sources.

Egypt obtains around 15-20% of its gas supply from Israel, and shortages from the country recently forced fertiliser producers in Egypt to halt operations last week.

Strategic goals

With the conflict showing little sign of slowing down, there are multiple scenarios that could develop in the coming days or weeks, the best of which would be complete de-escalation and the re-opening of diplomatic channels – as well as a halt to strikes on energy infrastructure. Although efforts to do this would lead to prices returning to pre-crisis levels rapidly and supply chains being disrupted only locally, this scenario is likely past us – with US President Donald Trump looking to get fully involved on his ally’s side – having already been aiding Israel in its defence and attacks on Iran covertly.

With Israel unable to finish a war against a much larger opponent such as Iran, and unable to hit Iranian nuclear facilities without specific US weaponry, broader help from the US and its junior partners such as the UK and Germany is inevitable, resulting in protracted tensions and a proxy war at best, and a full-scale regional war at worst.

A smaller-scale proxy war would likely offer increased and volatile oil prices, continued high shipping costs and significant global inflation – as well as limited investment in the region. A full-scale war would be catastrophic for all, having the potential to draw in other global powers. This nuclear option could include Iran opting to block the Strait of Hormuz in retaliation, a historic surge in oil prices, widespread paralysis on global trade and a likely global recession.

If the conflict continues – and it looks likely to do so until one side collapses or surrenders – the effects will continue to worsen progressively. The best option is to reach for a ceasefire immediately, however, the potential for the US to expand its influence in the region may prove to be too tempting to avoid.