About the author: Karen E. Young is a senior research scholar at Columbia University’s Center on Global Energy Policy.
The state of Israel and the terrorist group Hamas are engaged in an existential conflict, each threatening the survival of the other, as well as the survival of civilians, both Palestinian and Israeli, caught in-between. The conflict could widen into a regional or even global crisis. For energy markets and the global economy, the risks are considerable and could swerve or accelerate in response to multiple variables. Structurally, the global economy is in a moment of flux, with persistent inflationary pressure, lack of fiscal space for many indebted economies, competitive industrial policy in renewables that may detract from decarbonization incentives in the developing world, lack of clarity in the growth and direction of China’s economy, and an on-going war in Ukraine.
In the Arab world, Egypt and its 110 million citizens are edging closer to a full-on economic crisis, with currency devaluation sure to follow December’s presidential elections even in a best-case scenario. A war next door accelerates Egypt’s domestic destabilization. Lebanon, meanwhile, has no state capacity to contain violence or deliver services in a spreading crisis, nor any ability to restrain Hezbollah. The Eastern Mediterranean gas hub is already under strain, as Israel stopped gas exports to Egypt from its Tamar field after the Hamas attacks. Gulf investments in Israel’s gas projects could be upended, too. A U.S.-brokered deal last year between Israel and Lebanon raised hopes for Lebanese gas exploration.That now looks sure to fail, not only because the early findings have been disappointing, but because there will be little encouragement to explore further. The Arab states around Israel do not have the fiscal space or the political levers to manage security and economic crises at the same time.
All this amounts to an environment that discourages cooperation, encourages domestic repression, stresses the limits of international financial institutions, and is easily spooked by disinformation and active threats. It is indeed a dangerous moment.
For oil markets, Saudi Arabia maintains an ability to disrupt and surprise. In March, China brokered the resumption of diplomatic ties between Saudi Arabia and Iran that were broken in 2016. In September, during the U.N. General Assembly meetings, Saudi Crown Prince Mohamed Bin Salman intimated in a Fox News interview that normalization talks between his government and Israel were proceeding steadily. Both diplomatic efforts were signs of a structural shift within the Middle East.
Saudi Arabia is not hedging between Iran and Israel. Rather, it’s seeking to buoy itself by evaluating changing U.S. security relationships in the region, while protecting its ambitions for economic diversification and connectivity, including the potential for new energy sectors such as clean hydrogen and ammonia exports.
Oil market management has also weighed heavily. Saudi Arabia coordinates between Russia and others through OPEC+, an expansion of the original OPEC group. But Iran and Russia operate a shadow export market, while Saudi Arabia has tried to control OPEC+ output by shouldering cuts mostly to its own production. It is an era of constant contingency planning.
From Washington, the Biden administration has pushed normalization between the Gulf Arab states and Israel. The U.S. isn’t acting just out of benevolence or solely to promote religious co-existence in the Middle East. Rather, normalization with Israel is a strategy to pull the region’s key centers of capital and mobility into the U.S. orbit to counter China’s influence. Saudi Arabia has been preparing to defend itself and to navigate a new moment of decentralized power and the opportunity it expects for emerging markets. For the U.S., pushing normalization between Saudi Arabia and Israel, as well as lauding an India-Middle East Economic Corridor, are strategies of connectivity, both political and economic, to limit China and its access points around the Arabian Peninsula and to the Mediterranean. In exchange, Saudi Arabia has steadily increased its asks of the Biden administration, including security guarantees and nuclear technology.
The Saudi-Israel negotiation may seem dead now, but the prospect of conflict between Israel and Iran is what led Saudi Arabia to consider the deal in the first place. A revised arrangement could emerge in the war ahead, especially if oil prices stay high as the U.S. presidential election approaches. Saudi Arabia will have considerable leverage, born of spare oil capacity and the financial capacity and political interest to lead a regional reconfiguration against Iran and its proxies.
For the Gulf Arab states, there won’t be balancing between Israel and Iran, but only highly individualized contingency planning and recalibration. Bilateralism, and a willingness to engage in disparate public and private positions will likely become more the norm in foreign policy choices from Saudi Arabia, as well as its neighbors in the Gulf Cooperation Council. It will be a challenge for those governments to win domestic acceptance of flexibility in their foreign policies, but it’s also not a wide departure from recent practice.
Saudi Arabia and Iran also clearly see benefit in communicating. Iranian President Ebrahim Raisi and Saudi Crown Prince Mohammed bin Salman held a call and expressed joint support for Palestinians just days after the Hamas attack. It’s also safe to assume that there is communication between other GCC states and Israel. The contingencies will shift again in the event of a widening front against Israel by its neighbors, directly from Iran, through its proxy Hezbollah in Lebanon, or Iraqi militias.
Saudi Arabia is extremely vulnerable to these groups. It has been fighting the Iran-backed Houthi movement in Yemen, and Iran or its proxies could activate Houthi threats on Saudi territory. While many analysts focus on the threat to transit points like the Strait of Hormuz, Iran has already tested a playbook of using drones and missiles to hit oil infrastructure in both Saudi Arabia and the United Arab Emirates. That strategy has the advantage for Iran of leaving its own export points open while it directly attacks its neighbors at the source of their wealth. Should that happen, Saudi Arabia and Israel wouldn’t necessarily move closer to normalization, but they would find themselves on the same military side of a major conflict.
A frightening and open question is how Russia and China might cooperate, whether on oil sales or direct engagement or diplomacy with Iran. Israeli domestic politics too will drive the choices and the violence ahead.
There is no firm plan, only contingencies, and little vision for what may come next.
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