Hamas v Israel: Has Iran Failed?
Oil Markets Are Not Pricing In A Wider Middle Eastern War
In the immediate aftermath of Hamas’ October 7 genocidal attack on Israel, one question capturing much of the public’s attention was Iran’s level of involvement.
Just a couple of weeks ago, it seem quite plausible that Iran was using its network of terror proxies to escalate the war and widen it to encompass more countries in the Middle East.
And then…nothing.
Actually, worse than nothing (for Iran). While events are continuing to unfold between Israel and Hamas, oil markets have assessed Iran’s saber rattling, as well as Saudi Arabia’s sabers, and concluded that there will not be a wider conflict.
Approximately one month after Iran first threatened to escalate the war, oil prices are back where they started before Iran made those ominous threats.
How weak is global oil demand? So weak that even a war cannot sustain higher oil prices. So weak that even Iran’s proxy interventions between Israel and Hamas cannot sustain higher oil prices—which could mean Iran’s tactics are about to backfire spectacularly.
It helps if we recognize that, while the Israel-Hamas conflict has thus far remained relatively contained to Israel and Gaza, Iran’s terror proxies are believed by many to be trying to expand and escalate the conflict. Certainly many within the Israeli government believe this to be the case.
Israeli Permanent Representative to the United Nations Gilad Erdan also took aim at Iran during the event.
He accused the Islamic Republic of trying to "surround Israel with terror armies" including both Hamas and the powerful Lebanese Hezbollah movement, whose forces outnumber even some Western militaries, according to Erdan.
As these militias, which also include "Axis of Resistance" groups in Iraq, Syria, Yemen and elsewhere, become emboldened, Erdan said, "one day when Iran becomes a nuclear power, it can provide a nuclear umbrella" to these forces.
While Iran has openly touted its ties to such militias, most of which, with the notable exception of Sunni Muslim Hamas, are Shiite Muslim, Tehran has always denied seeking to develop nuclear weapons. Iranian officials have also distanced themselves from the October 7 attack, though they have praised it.
While Iran has formally denied any direct connection to Hamas’ October 7 terror attack, Iran’s longstanding ties to Hamas and support for the terror group means Iran had at least an indirect role in the attacks.
Israeli Major General Michael Edelstein has also asserted the October 7 attack bears a significant “Iranian footprint”, although he declined to give specific data to support that assessment.
Throughout October, moreover, there were signs that Iran was using its terror proxies against both Israeli targets and US targets in the region.
However, by far the most visible sign of attempted escalation has been by Yemen’s Houthi rebels, which have in recent weeks launched multiple missile attacks against both Israel and, perhaps unsurprisingly, Saudi Arabia.
Yemen’s Houthi rebels for the first time Tuesday claimed missile and drone attacks targeting Israel, drawing their main sponsor Iran closer into the ongoing Israel-Hamas war in the Gaza Strip and further raising the risks of a regional conflict erupting.
The Houthis had been suspected of an attack earlier this month targeting Israel by sending missiles and drones over the crucial shipping lane of the Red Sea, an assault that saw the U.S. Navy shoot down the projectiles.
The Houthis in Yemen, remember, have long been funded and supported by Iran, and only just began peace talks with Saudi Arabia. With the Houthis—who arguably are Yemen’s government—essentially at war with Israel, Iran is certainly that much closer to active involvement in the conflict.
While events may outwardly be pointing towards Iran attempting to expand and escalate the conflict, however, oil markets have apparently decided not to be all that concerned with that possibility. Oil prices have been receding from peaks reached shortly after Iran threatened to escalate the conflict with Israel.
Currently, Brent Crude and West Texas Intermediate are trading in the same general range they reached immediately after the October 7th attacks. As Iran sits on one side of the Persian Gulf—and also on one side of the strategic Strait of Hormuz chokepoint—if Iran were seen as entering into or causing a conflict which could disrupt oil shipments through that passage, oil prices would have to rise to reflect the heightened supply risk. Right now, that isn’t happening.
This has been a pattern that has played out repeatedly all year long with regards to oil prices. Both Saudi Arabia and Russia have, separately and jointly, taken measures to curtail oil supply in order to prop up the price of oil, only to see that price fall back down to earth time and again.
Nor can declines in oil prices be tied to releases from the US Strategic Petroleum Reserve. For the month of October, there haven’t been any.
Oil traders have looked at the geopolitical landscape and are simply not all that concerned about Iran at the moment. Iran may be trying to widen the conflict and escalate it, but thus far it has had only marginal results.
What has not been marginal, however, has been the consequence of oil price weakness and the Saudi production cuts on the Saudi economy. Saudi Arabia has been taking it on the chin with respect to its oil economy this year.
According to the flash estimates by the General Authority for Statistics (GASTAT), the real Gross Domestic Product (GDP) of Saudi Arabia decreased by 4.5% in Q3/2023 compared to Q3/2022. This result was due to the decrease in oil activities by 17.3%, while non-oil activities and government activities grew by 3.6% and 1.9% respectively, on an annual basis. (Figure1)
A 17% year on year decline for any economic sector in any country is significant. When it is the oil sector in Saudi Arabia, that decline borders on outright collapse, yet that is what happened to Saudi Arabia in the 3rd Quarter.
We should note also that the third quarter washout numbers came after a 3.8% drop during the second quarter—this decline is no fluke.
Indeed, the Saudi economy peaked in the immediate aftermath of Russia’s invasion of Ukraine, and has been slowing ever since.
While Saudi Arabia has been trying to diversify its economy, it is still heavily dependent on its energy sector, and as energy goes, so goes the economy.
The 2022 peak in economic growth happened, of course, largely due to the war in Ukraine and the roiling of oil prices that happened when Russia was sanctioned.
As oil demand has softened, so has Saudi Arabia’s economy.
Saudi Arabia’s economic dilemma matters to Israel for one simple reason: The Abraham Accords1.
The Abraham Accords are a diplomatic initiative spearheaded by former President Donald Trump in 2020 to normalize diplomatic, political, and economic relations between Israel and the Arab nations. Centered on a declaration of peace, religious tolerance, and political and commercial engagement among the three Abrahamic faiths (Judaism, Christianity, and Islam), they have advanced as a series of bilateral agreements between Israel and (thus far) Bahrain, Morocco, and the United Arab Emirates. For its part Sudan has also independently signed the Abraham Accords Declaration.
Prior to the October 7 attack, Saudi Arabia and Israel, under the auspices of the United States State Department, were getting close to officially normalizing diplomatic as well as economic relations, as called for in the Abraham Accords. This would have been the fourth such agreement Israel had completed with one of its Arab neighbors, and by far the most significant.
It is widely believed that the pending agreement with Saudi Arabia was a primary catalyst for Hamas launching the October 7 attack, with an eye towards disrupting the peace initiative.
In early October, President Joe Biden seemed poised to achieve a historic prize: normalizing relations between Israel and Saudi Arabia, the most powerful country in the Middle East.
The discussions were part of a process which began in 2020 under President Donald Trump, when Bahrain and the United Arab Emirates began formal diplomatic relations with Israel, bringing economic and military benefits.
The process went so smoothly because it ignored the hardest issue to resolve: what to do about the Palestinian territories.
On October 7, ignoring that suddenly became impossible — which was likely just what Hamas intended.
In this context, when we say “Hamas”, we can just as easily say “Iran”, for Iran is Hamas’ paymaster.
As Israel conducts its reprisal campaign in Gaza, it is straining the existing agreements, and it has brought the negotiation process with Saudi Arabia to a dead stop. The people within the various Arab nations are naturally less than thrilled with the violence and ever-growing death toll among the Palestinian Arabs. However, thus far the existing agreements between Israel and the Arab states have held.
Gulf states had hoped this would be a year of de-escalation in the region. They wanted calm to focus on ambitious plans to diversify their economies. Now the region’s oldest conflict has roared back to life. For one Gulf monarchy, Qatar, which has supported Hamas, the immediate goal is self-preservation. Saudi Arabia and the United Arab Emirates, however, want to weaken Hamas, forestall a wider confrontation with Iran and somehow keep alive their vision of an autocratic but more peaceful and prosperous region. It is a delicate and dangerous balancing act.
Yet what the conflict between Israel and Hamas does not change—and truly cannot change—is that peace in the Middle East would be extremely good for business. Saudi Arabia wants to normalize relations with Israel primarily for economic reasons.
The economic blessings of peace in the Arab world are also considered to be the major reasons why Iran—and thus Hamas—want to see the Abraham Accords disrupted. Rapprochement between Israel and the Arab states is unquestionably economically beneficial to the Arab states, but that economic benefit is not a geopolitical benefit to Iran, which is seeking to be the dominant power in the region.
If one views Iran’s presumed meddlings in the Israel-Hamas conflict through a “Great Power” lens, their motives become quite clear: more conflict between Arabs and Israeli equates to more power and influence for Iran. This makes Iran perpetually hostile to the Abraham Accords, and keen on disrupting them at every turn.
If disrupting the Abraham Accords is Iran’s ultimate geopolitical objective, and if we presume that Hamas launched its October 7 attack at Iran’s urging in part to disrupt Saudi Arabia joining the Abraham Accords, Iran’s failure to incite wider war may create a problem for Iran, in the form of lower—and potentially trending lower—oil prices.
With oil markets having largely fully discounted supply chain risks from a potential war in the Persian Gulf region, the prior downward trends in oil prices are likely to become preeminent once more.
If this should happen, then it will not be long before even the price premium brought about by the initial Hamas attack on October 7 will recede, and oil prices will drop down possibly as low as where they were in early summer. That outcome would put added pressure on Saudi Arabia’s oil economy, and create further need for regional peace, in order for the kingdom to make further progress on diversifying its economy.
Already, Saudi Arabia has been working on multiple fronts to pacify the troubled region, with clear economic motivations for playing the peacemaker. In addition to negotiating the Abraham Accords with Israel, Saudi Arabia has also been seeking for a peaceful end to its conflicts with the Houthis in Yemen, and has been attempting to mediate a peaceful resolution to conflicts within Sudan.
“We believe that common market integration is good for everybody in the Gulf Cooperation Council. Investors want to be with other investors, and they want to be with professional companies like the accounting, the legal, financial advisory (sectors),” [Minister of Investment Khalid] Al-Falih told CNN. “A rising tide lifts all boats.”
In a bid to ensure stability in the region and a safer environment for investors, Riyadh has walked back from a hawkish foreign policy it had adopted when Crown Prince Mohammed bin Salman entered the picture after his father King Salman took the throne in 2015. It has reconciled with Turkey and Qatar, re-engaged with Syria, supported a ceasefire in Yemen, and is normalizing ties with Iran.
“We are guided by our own interests, but also in a benevolent way to our region, because we don’t want our interests to be served while hurting any of our brothers and sisters and surrounding countries,” said Falih. “And wherever our interests are served through reconciliation, through strong relationships with our neighbors and friends, we are the first to advocate for that, to consistently push for that.”
Economics are already driving foreign policy decisions in Riyadh. It is hardly inconceivable, therefore, that added economic pressures on Riyadh will further motivate further foreign policy change.
While the Saudis are currently hesitant to continue along the trajectory of rapprochement with Israel for fear of antagonizing their own people and inviting unrest within the kingdom itself, if oil is not going to be the economic boon that it has been for Saudi Arabia, that fear may cease to be the primary concern for the ruling family. Peace in the Red Sea region is essential for tourism to develop along the coastline, which would bring needed non-oil-related jobs and economic development not just to Saudi Arabia, but even to Yemen, Sudan, and Eritrea.
Without peace, the only likely economic path for the Red Sea is continued reliance on fossil fuel production—which is not a great path in an era of falling oil prices.
While the Abraham Accords themselves will not resolve the conflicts between Palestinian Arabs and Israel, Saudi Arabia joining the Abraham Accords would go a long way towards persuading other Arab states to participate in the initiative, which would have the inevitable result of isolating the Palestinian Arabs diplomatically. One view of the Abraham Accords even in 2021, after Donald Trump left office, was that the initiative would help drive a settlement between Israel and the Palestinian Arabs.
"We continue to welcome the economic cooperation between Israel and all countries in the region. We hope that normalisation can be leveraged to advance progress on the Israeli-Palestinian tracks," a senior State Department official, speaking on the condition of anonymity said.
To the extent that assessment was accurate in 2021, it remains accurate today. A pathway to peace for Israel and the Palestinian Arabs would therefore still entail normalization and rapprochement between Israel and the Arab states surrounding it.
Falling oil prices and a declining oil economy for Saudi Arabia has as potential consequence a certain urgency for the kingdom to pursue the Abraham Accords for its own interests. While Hamas’ decision to reinvigorate the cycle of violence between Israel and the Palestinian Arabs has made pursuing the Accords momentarily problematic for Saudi Arabia, the inability of Hamas to drive up the price of oil and thus “rescue” Saudi Arabia’s oil economy is making the Accords even more important to Saudi Arabia.
Perversely, if we look at events through a Great Power lens, and presume that Iran’s hegemonic ambitions in the Middle East are the driving force behind Hamas’ attack and thus the entirety of this current round of war for Israel, Iran’s failure to achieve a wider expansion of that war could ultimately make peace with Israel increasingly important to the Arab states.
No matter what transpires between Israel and Hamas, Saudi Arabia’s economic dilemmas remain the same: it needs to continue diversifying its economy and end its reliance on oil prices, which means it needs foreign investment and foreign participation in things like tourism to develop other sources of revenue. Neither aspect of foreign participation in the Saudi economy can move forward without Saudi Arabia making a stand for peace in the region. For Riyadh, that means the Abraham Accords eventually must be signed. Riyadh must receive ambassadors from Jerusalem in order to receive sufficient money from the wider world.
Saudi Arabia is likely to continue working to normalize peaceful diplomatic relations with Israel because it continues to be in Saudi Arabia’s interests to do so. The fallout from this latest cycle of violence with Hamas is ultimately increasing the pressure on Saudi Arabia to achieve normal peaceful diplomatic relations with Israel. While the immediate effect of the violence in Gaza is to delay Saudi Arabia signing the Abraham Accords, the longer-term effect of the violence in Gaza is quite likely to make Saudi Arabia signing the Abraham Accords inevitable.
Peace is fragile, and war is all too often contagious. We should not presume that Iran will continue to fail at instigating wider conflict with Israel. The right combination of terror attacks in Israel and on US installations within the Middle East could yet succeed in bringing about that wider conflict, and the Houthis might yet renew their conflict with Saudi Arabia. Neither outcome has yet been made impossible, nor even entirely improbable.
Yet even in the Middle East, wars eventually end and peace eventually arises. Iran’s hegemonic tactics do not change that reality, nor can they. It becomes possible, therefore, that the failure of Iran’s hegemonic tactics will highlight not just the benefits of peace with Israel but also the inevitability of peace with Israel. If Iran cannot instigate a wider war, if Iran cannot make Middle Eastern oil supplies more precarious and thus more pricey, Iran and its meddlings with Israel and Hamas cannot be economically helpful to Saudi Arabia and to the other oil-producing states in the region.
The Abraham Accords hold out for the Arab states an economic future built on a firmer foundation than just oil prices. The very thing Iran is failing to deliver for the Middle East is the very thing the Abraham Accords puts front and center, and at least promises to deliver.
If Iran does not succeed in widening the war currently between Israel and Hamas, it may by that failure succeed in making peace between Israel and the whole of the Arab states inevitable, leaving the Palestinian Arabs with few political and diplomatic legs on which to stand.
Iran is wanting war today in the Middle East. If current trends hold, it may instead get peace tomorrow.
The Abraham Accords - United States Department of State. 3 Oct. 2023, https://www.state.gov/the-abraham-accords/.
Interesting. https://www.voanews.com/a/israel-hamas-conflict-reality-check-for-india-middle-east-europe-economic-corridor-/7323955.html
This analysis is magnitudes of order better than any others I’ve read in the mainstream media! If there was any competence left in rags such as the New York Times, they would be offering you huge piles of money to write for them, Mr. Kust.
And what heartening news! If the oil industry isn’t pricing in the expectation of WW3, that’s the most hopeful sign in weeks!