How the Israel-Hamas War Could Spike Oil Prices

As Israel bombs the Gaza Strip in response to Hamas’s deadly attacks against Israel over the weekend, attention has turned to retaliation against Iran—especially since the Palestinian militant group let it be known that it received support from Iran for the attacks and Israel’s president directly blamed the country.

The Wall Street Journal reports that “details of the operation were refined during several meetings in Beirut attended by IRGC [Iranian Islamic Revolutionary Guard Corps] officers and representatives of four Iran-backed militant groups, including Hamas,” while the BBC has received confirmation of Iran’s involvement from Hamas spokesman Ghazi Hamad. As Danielle Pletka wrote over the weekend in Foreign Policy, some of the Iranian strategic advice and backing has been in plain sight for more than a year. If the Iran-backed Hezbollah decides to join the hostilities, Israeli retaliation against Iran would be even more likely.

Register here for an FP Live discussion on what to expect next amid the Israel-Hamas war, with former U.S. State Department Middle East analyst Aaron David Miller on Tuesday, Oct. 10, at 8:30 a.m. EDT.

But punishing Iran is not the slam dunk it may seem. For the past few years, the Islamic Republic’s military has increasingly been harassing international vessels in the Strait of Hormuz —which lies between Iran and Oman—and it can quickly ramp up those activities. That would spell trouble for the world, because 30 percent of all oil travels through the strait.

Especially in the past four years, Iran has been taking advantage of global dependence on the Strait of Hormuz to demonstrate its power. Four years ago, the IRGC dramatically seized the Swedish-owned, British-flagged tanker Stena Impero as it sailed through the strait. Around the same time, four other commercial vessels were damaged in “sabotage attacks” thought to have been carried out by Iran. In 2021, Iranian forces seized a South Korean-flagged tanker, and just this July, they attempted to seize two tankers. According to the U.S. Defense Department, in the past two years, Iran has attacked or seized some 20 merchant vessels.

In August, this dangerous state of affairs prompted the Pentagon to dispatch some 3,000 sailors and Marines (along with an amphibious assault ship—which can carry more than two dozen aircraft—and a dock landing ship). European Maritime Awareness in the Strait of Hormuz, an initiative by Germany, France, Italy, and a few other European countries, has escorted 162 merchant vessels this year, including 124 since June.

Ships that ordinarily travel through the Strait of Hormuz will, in fact, become the most tangible indicator of escalation involving Iran: if insurers consider such violence likely, shipowners will have to reroute their vessels to alternative—and much longer—journeys. That will cause disruption and price spikes in the oil market. “I don’t think it’s in Iran’s interest to shut down the Strait of Hormuz,” said Cormac Mc Garry, a maritime analyst with Control Risks. “But shipowners are very cautious. I’ve seen some owners wanting to pull out completely if another ship gets attacked.”

Trying to keep order in the Strait of Hormuz itself is creating highly volatile situations. Late last month, IRGC forces shone a laser at attack helicopter pilots assigned to the U.S. force in the strait while the chopper was airborne. Indeed, every action that the U.S. forces undertake to guard commercial vessels against Iranian harassment can cause Iranian forces to retaliate—which could make an armed conflict a fait accompli.

“The shipping situation in the Strait of Hormuz has been very tense for some time,” said Andrew Lewis, a retired vice admiral of the U.S. Navy. “We’ve been boiling the frog. We’ve allowed the IRGCN [the IRGC’s naval branch] to harass ships and conduct exercises adjacent to the traffic lane, and we’ve allowed them to brandish weapons next to an aircraft carrier. Can they do much damage to an aircraft carrier? No. But they can kill people.”

If there is a direct conflict between Israel and Iran, the Strait of Hormuz risks becoming extremely dangerous for international shipping. “Any shipping affiliated with Israel is especially exposed,” Mc Garry said. “Whatever pathway this takes, if Israel retaliates against Iran, and Iran attacks Israeli-affiliated shipping in the Strait of Hormuz, it will be more forceful than Iran’s usual attacks on shipping in the strait.”

That has put insurers and shipowners, not to mention crews, on high alert. That means insurers have to decide whether they can even take the risk of letting vessels travel there. “As transits through Hormuz have to be advised in advance, underwriters will be able to react quickly to any developments,” said Neil Roberts, the secretary of the Joint War Committee, the London-based insurance body that sets risk levels for international shipping.

The fact that the United States is deploying a strike group to the eastern Mediterranean, close to Israel, Gaza, and the Suez Canal, adds more uncertainty. “The potential it adds for further escalatory measures will be a factor in risk assessment for owners and insurers,” Roberts explained.

Because merchant vessels have the right to travel through other countries’ territorial waters, Iran would violate international maritime rules if it tried to block tankers and other civilian ships from traversing the Strait of Hormuz—but because about half of the strait is located in Iranian territorial waters, Iranian forces have the right to be in their part of it, too, and they can avenge any retaliation against Iran by targeting shipping.

The question is which ships it would target, how many, and in which manner. The U.S. forces are likely to try to defuse any potential escalation, Lewis said: “We have preplanned responses for the embarked security teams,” he said, referring to the troops now serving onboard commercial vessels as part of the U.S. Navy-Marine deployment to the strait, “and those responses won’t change as a result of the Israel-Hamas conflict. But the teams may not use those responses because they’re likely to receive instructions to be conservative.”

But, Lewis cautioned, “the Iranians are not on the same timeline as we are. Their response [to any Israeli attacks] may not be immediate.”

It may seem frivolous to worry about oil tankers in the Strait of Hormuz when hundreds of Israelis and Palestinians have been killed within the course of just a few days. But because the world still depends on oil for 31 percent of its energy, any disruption in the strait would have immediate repercussions. And shipping companies, captains, insurers—and ultimately consumers—are pawns as regional powers decide their next steps.