Iran-Israel Conflict – Domino Effect on Crude Oil Trade and Logistics

18 October 2024

Iran and Israel, countries with good cooperative and diplomatic relations in the 1960s, have turned bitter since the Iranian revolution. This bitterness resulted in proxy conflicts, cyber-attacks, damage to shipping routes and shipments, and military threats.

This strained relationship, affects global trade, energy security, and economic stability, drawing in international powers and increasing uncertainty in key sectors like oil and gas exports. Growing tension affects not only regional peace but also has a far-reaching impact on market dynamics. Let’s understand them one by one.

How Does Iran-Isreal Conflict Threaten Trade Route?

If the conflict between Iran and Israel is not stopped, it may trigger a domino effect in the region which drastically affects global trade routes. Several shipments, vessels, and logistics are controlled with major waterways globally such as the Strait of Hormuz, Suez Canal, etc. These are the lifelines of global oil shipments and goods transportation.

World’s Major Oil and Gas Transit Chokepoints

Chokepoints are the strategic narrow waterways that allow goods to be transported through ships and cargo. They are crucial for the global energy supply, for instance, the Strait of Hormuz (SoH), Suez Canal (SC), and Bab-El-Mandeb (BeM) handle major portions of crude oil and its products. Let’s understand how the Iran and Israel conflict may disrupt the supply and price by major chokepoints.

Strait of Malacca (SoM)

This narrow pass connects the Indian Ocean with the Pacific Ocean. It’s one of the world’s most crucial shipping lanes.

It also faces challenges like piracy, congestion, and geo-political tensions, making international trade difficult.

The total oil flows from the SoM increased by 1 million b/d in 2023, compared to 2022.

LNG flow increased by 0.5 Bcf/d in 2023, compared to the previous year.

In the last three years, crude oil and condensate supply increased by 1.7 million b/d.

 

*** million barrels per day (b/d)**

 

Strait Of Hormuz (SoH)

The SoH is the most strategic narrow waterway that separates Iran from the Musandam peninsula of Oman. It connects the Persian Gulf to the Arabian Sea.

Its strategic location makes this strait crucial for global trade, as half of the world’s supply passes through it.

Crude Oil and Condensate is the most supplied product with the slightest decline of 0.6 million barrels per day in 2023, compared to the previous year.

LNG flows from SoH to the world also declined by 0.5 bcf/d in 2023.

Products	2022	2023
Total oil flows through the SoH	21.3	21
Crude oil and condensate	15.7	15.1
Petroleum products	5.6	5.9
World maritime oil trade	76.5	77.8
World total petroleum & other liquids consumption	100	102
LNG flows through SoH (bcf/d)	11	10.5

 

***Million Barrel Per day***

Oil and Gas Through the Suez Canal, SUMED pipeline, & Bab el-Mandeb Strait

The Suez Canal (SC) is a manmade waterway built in Egypt, connecting the Mediterranean Sea to the Red Sea. It shortens the trade route between Europe and Asia by thousands of kilometres. On the other hand, the SUMED pipeline emerges as a valuable alternative to the Suez Canal. This pipeline also reduces the risk associated with disruption that could affect the Suez Canal.

The total crude oil and petroleum products flow from the SC and the SUMED Pipeline increased by 1.4 million bp/d in 2023.

LNG flow from the SC and Bal-eb-Mandeb (BEM) has decreased by 0.4 and 0.6 billion cf/d, respectively in 2023.

BEM contribute around 10% of the global oil and gas passes through this route, making it essential for global energy security.

Any disruptions to this strait can significantly impact economies, particularly the nations that are reliant on oil and energy.

 

**Million Barrels Per Day**

 

What Would Be the Impact of Tension on the Global Economy?

Shortage of Oil Globally –

Iran is among the top crude oil producers in the world with approximately 3 million bp/d. This roughly translates into 4% of the global supply. Any escalation could lead to a shortage of supply and chaos for energy.

Price Fluctuation and Logistics –

Iran may block or damage the Strait of Hormuz If the escalation worsens. This may disrupt around 30% of the global oil and gas supply.

Global Slowdown –

As the fuel price escalates, the commodities price will increase, resulting in a lack of demand and supply. This further creates a domino effect on consumer goods and manufacturing units.

Conclusion

This escalating tension in the Middle East acts like an early warning sign for the global economy and trade. If not addressed on time, the threat of global slowdown will become severe. Hence, leaders across the region must find a way to mitigate the effect of geo-political tension.