Oil as a Weapon?

I have no doubt the hottest media topic today is the Israeli-Palestinian conflict in Gaza. It is not my intention here to get into a debate about the rights and wrongs of either side, but if you are investor, you may have to make some decisions about how this conflict could potentially drive oil prices.

Besides rhetoric of some countries with verbal threats, demonstrations, boycotts, etc Iran is calling oil-producing states to launch an embargo in protest of Israel’s current military operations in Gaza. Similarly, we have seen of similar calls from lawmakers in Bahrain, a country whose political landscape is dominated by its Shiite majority – kind of associated with Iran.

Of immediate I see a possible significant in relation to Yom Kippur war, which was fought from October 6 to October 26, 1973. As one of the consequences, the members of OPEC (consisting of the Arab members of OPEC plus Egypt and Syria) proclaimed an oil embargo "in response to the U.S. decision to re-supply the Israeli military during the Yom Kippur war. OPEC declared it would no longer ship oil to the United States and other countries if they supported Israel in the conflict. Independently, OPEC members agreed to use their leverage over the world price-setting mechanism for oil in order to stabilize their real incomes by raising world oil prices. This action followed several years of steep income declines after the end of Bretton Woods, The 1973 "oil price shock", along with the 1973–1974 stock market crash, have been regarded as the first event since the Great Depression to have a persistent economic effect.

This time around, I believe, the probability of 1973 recur is low, but rather I see as an attempt by Iran itself to score political points by emphasizing publicly that Tehran is the only player in the region that stands up in supporting the Palestinians in this trying times. The primary goal is to make its Arab rivals look bad, especially Saudi Arabia and the GCC allies.

The truth is that Tehran is not in position to come to the aid of the Palestinians and only big oil players like Saudi Arabia and other smaller Persian Gulf states would be able to make such threats, but unfortunately they are far more concerned about their bottom-lines. Even Saudi Arabia, the main mover and shaker in OPEC is already facing difficulty in getting other cartel members to abide by recently announced production cuts, especially as oil prices has fallen by some 70% from the record high of July 2008.

Iran is just another hopeful that its threat will kill two birds with one stone, pushing prices up even if there is no embargo. Despite its long slide, oil prices have jumped some 25% in the last 10 days since the Israeli operation began. Is it that markets are spooked or are they will be spooked further by the threat of an embargo? Or perhaps, Saudi Arabia and its allies are hoping that the assault will cut Hamas down to more manageable proportions and thwart Iran’s attempts to use the Israeli-Palestinian conflict to its own advantage.