The Palestinian-Israeli conflict has triggered the global oil market, will the oil crisis repeat itself? How Saudi Arabia takes its position is in focus

The Palestinian-Israeli conflict, which has escalated since the end of last week, has once again triggered global risk asset volatility, with crude oil futures pulled crude oil futures up nearly 5 percent on fears of a deterioration in the Middle East.

Looking back at history, the war in the Middle East has repeatedly been the trigger for the global energy crisis, and this time Saudi Arabia's position, which has been caught in rumors of a trilateral agreement, has become the focus of attention from the outside world.

Tamas Varga, a senior market analyst at crude oil broker PVMOil Associates, said in an interview with the first financial reporter that the impact of Palestine and Israel on the global crude oil supply itself is almost negligible, "But if you consider the impact of the Middle East war on oil prices in the past five decades, if the situation further escalates and lasts longer, the intervention of oil-producing countries will often trigger the risk of oil crisis." ”

War and oil crisis in the Middle East

At present, the international energy market is undergoing a period of transition, first of all, emerging countries from the Americas and Africa are entering the supply map, secondly, crude oil prices are no longer running low, volatility continues to increase, and the influence of geopolitics and conflicts is increasing. In addition, U.S. control over global shipping lanes and pipelines has declined.

According to a report by Harvard's Belfer Center for Science and International Affairs, oil is increasingly a major cause of regional conflicts and domestic political instability, with nearly half of all regional wars since 1973 being oil-related. Oil-related conflicts can be divided into many types, including competition for shipping lanes and pipelines, terrorism that destroys oil facilities and energy theft for financing, oil aggression and resource wars, which are potential sources of international conflicts.

With the increasing number of proven reserves, the Middle East has gradually become the center of the world's crude oil industry. Since the establishment of the Organization of the Petroleum Exporting Countries (OPEC), which is dominated by Arab countries, three energy crises in the past 50 years have been closely related to it.

When the Fourth Middle East War broke out in October 1973, Arab countries sacrificed oil weapons for the first time. In order to crack down on Israel and its supporters, and at the same time express their dissatisfaction with the artificial low oil prices of international oil and gas giants, Arab members of OPEC announced measures to reduce production and raise prices for Western countries, and the price of crude oil on the international market rose from $2.95 in early 1973 to $11.65.

This led to the worst global economic crisis since World War II, with productivity growth slowing markedly in all industrialized countries, and even negative growth in the United States, the United Kingdom, and Japan in 1974. However, the Arab countries that launched the oil war increased their economic strength, raising prices alone, and the oil revenues of Arab countries soared from $30 billion in 1973 to $110 billion in 1974.

At the end of 1978, the political situation in Iran, then the world's second largest oil exporter, underwent drastic changes, Shah Pahlavi stepped down, and Iran stopped exporting oil for 60 days, triggering a second oil crisis. Then the Iran-Iraq War broke out, and the two major oil-producing countries stopped production, causing a global oil supply shortfall of up to 6 million barrels per day, accounting for 10% of the world's total consumption. Oil prices soared from $13 a barrel in early 1979 to $34 in 1980 and lasted for more than half a year, becoming a major cause of another full-blown recession in the West in the late 70s. Growth in the United States also fell by 3 percent during that period. OPEC's influence on the world oil market reached its peak.

In August 1990, the Gulf War broke out, igniting the third oil crisis. Then-U.S. President George H.W. Bush said Gulf oil was a "national interest" of the United States. The interruption of Iraq's crude oil supply caused international oil prices to rise from a high of $14 per barrel to $42 per barrel in three months, and the economies of the United States and Britain were in trouble, and global economic growth fell below 2% in 1991. The International Energy Agency (IEA) then launched an emergency plan to put 2.5 million barrels of crude oil reserves on the market per day, and OPEC producers, led by Saudi Arabia, quickly increased production to stabilize oil prices.

Will Saudi Arabia adjust its strategy this time?

As a regional power and OPEC leader, Saudi Arabia is considered likely to be the key determinant of this oil price trend.

At present, US President Joe Biden faces the challenge of re-election, and the United States is seeking a trilateral agreement with Saudi Arabia and Israel, the core of which is the normalization of relations between Saudi Arabia and Israel in exchange for US arms sales, security guarantees and support for helping to build civilian nuclear facilities. Saudi Arabia agreed that it is willing to increase production early next year to balance market supply if oil prices remain high.

According to Xinhua News Agency, on September 10, local time, Brett McGurk, coordinator for Middle East and North Africa affairs of the US National Security Council, and Barbara Liv, assistant secretary of state for Near East affairs, visited Saudi Arabia to further mediate to promote an agreement between Israel and Saudi Arabia.

It is worth mentioning that just before the outbreak of the conflict, Saudi Crown Prince Mohammed bin Salman said that Saudi Arabia-Israel relations were about to usher in a breakthrough. Saudi Arabia has not recognized Israel as legitimate since its founding in 1948. In addition, two senior White House officials flew to Saudi Arabia late last month, stressing that higher oil prices will cloud the prospects for the deal, as the White House needs congressional support to facilitate the deal.

At its meeting earlier this month, the Organization of Oil-Producing Countries (OPEC+) left its current production cut plan unchanged. Saudi Arabia said it would extend the voluntary 1 million b/d cut until the end of 2023, and Russia also announced it would maintain additional export restrictions of 300,000 b/d until the end of December. However, rumors of a tripartite agreement involving the United States and Israel have made the production capacity path after the expiration of the production cuts full of uncertainty. Saudi negotiators, for example, stressed that market conditions will guide any production action, and that these discussions do not represent a long-term price-cut agreement.

In the past week, factors such as concerns about demand have caused global oil prices to fall by nearly 9% from their yearly highs, and maintaining them high is critical for the finances of oil producers. Earlier this month, the Saudi Ministry of Finance reported that real gross domestic product (GDP) was expected to grow by just 0.03% this year, compared with the previous forecast in the budget report at the beginning of the year of the year of 3.1% growth and the projected budget deficit this year.

Varga told First Finance and Economics that the recent drop in oil prices is partly due to the market's digestion of the impact of additional production cuts in Saudi Arabia and Russia, and at the same time, the cautious stance of global central banks in monetary policy has also impacted the demand side. He reminded that Saudi Arabia is a super-energy power with the ability to influence global supply and market prices, so its position is very critical for future oil price trends.

For Saudi Arabia, it is estimated that it needs nearly $100 a barrel of crude oil to meet government spending and Vision 2030. Now Saudi Arabia is aggressively expanding its transformation investments, from being dubbed a futuristic city of Neom to building momentum for its World Cup bid. The country's top football league has attracted a lot of attention for bringing in a number of superstars in the summer transfer window.

Varga believes that Saudi Arabia played a decisive role in the OPEC+ production reduction negotiations that began last year, and its cooperation with Russia is a guarantee that oil prices will return above $80. "In the face of challenging global economic prospects, if Saudi Arabia plans to increase production, how to coordinate the interests of various oil-producing countries and avoid competitive production increases from disrupting the balance of supply and demand will be a new problem that will have to be faced." He said.