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The Politics of Oil

Energy independence for Israel is a double-edged sword. While the country wants to rely less on suppliers from the Middle East, autarchy might come at the price of a reduced American commitment in the Middle East.

The political developments in Egypt jeopardize important infrastructure that connects the North-African country with Israel, to which Egypt supplies two billion cubic meters of gas per year. The pipe is subject to a constant threat of terrorist attacks, and lately also to popular skepticism. Egyptian voters take issue with the discounts that Egypt offers Israel for gas deliveries.

But actually, providing a discount for gas supplied through pipelines is the norm. Around 300 million US Dollars have been invested into the pipeline, and granting a long-term contract with a discount on the market price is meant to bundle both supplier and consumer together. Yet, as usually happens during electoral times, the contract has been misinterpreted and used for the game of populism. On top of this, the pipe has been attacked again and is currently not operative.

It therefore seems likely that Israel will change its supply strategy in the coming years. A move away from Egyptian gas supplies may increase its degree of isolation from the region and may lead to an even deeper integration with the international market. Israel has proven to be very flexible in terms of energy strategy in the last decade, and the recent events in the Middle East do not represent the first time when the country had to face abrupt changes in the prospects of the energy market. Until the Islamic Revolution of 1979, Israel’s top oil supplier was Iran. The deal was a blunt calculation by the Shah of Teheran: Israel and Iran were the cornerstones of America’s influence in the region. But when the revolution toppled the Shah, trade was halted and Israel had to look for different suppliers. Today, its oil is sourced through the open market from countries such as Russia, Mexico, Colombia, and Angola.

Political considerations might become more worrisome to Israel

Israel’s new goal is energy independence, achieved through the development of domestic gas fields (particularly two sites called “Leviathan” and “Tamar”). The first site is estimated to contain 450 billion cubic meters of gas – the equivalent of twenty years of supply from Egypt. An additional 250 to 300 billion cubic meters should come from Tamar. The international market can supply the rest, coupled with a wise strategy of energy efficiency and renewables. It seems therefore that the organizational aspects of Israel’s energy sourcing are safe.

Nevertheless, political considerations might become more worrisome to Israel. Other countries in the region are adjusting their energy strategies as well, and the US is also moving rapidly towards (partial_ energy independence. Large discoveries of shale gas in North America, together with supplies of oil from Canada, brought the price of the WTI blend of crude oil (the reference one in North America) to a price of around 15 dollars less than the Brent blend (the European one). Moreover, the recent fears of a generalized economic mayhem caused both blend prices to slip in a quite abrupt fashion. Between February and March 2012, the WTI was topping out at 110 USD. In June, it touched 80 USD. The same story applies to the Brent blend: It slipped from 125 to 95 USD in the blink of an eye.

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Have we seen something similar before? Maybe. The Big Price Slump in oil history happened between 1985 and 1986, when the price for a barrel of oil hit rock bottom at 10 dollars.
The culprits were the economic downturn of the previous years (thanks to the energy crises of the 1970s), a partial substitution of oil consumption with nuclear and gas, and above all new oil from Alaska, the Gulf of Mexico and the North Sea. In the current situation, the “new” production is mostly dependent on gas. There is some degree of substitution between oil and gas in the medium term, and this is exactly what is happening in the US. The economic slowdown then reduces demand (or, at least, contains its growth, as it is happening in China).

Interestingly, American energy independence may also lead to a change in the attitude of Washington towards the Middle East and towards Israel – and this could be the most important aspect for Jerusalem. Since American forces have withdrawn from Iraq, the US government – cash-strapped, and still fighting the longest war in American history in Afghanistan – may seek to reduce its commitments in the Middle East. This could represent a new element of isolation for Israel, that – even more than in the past – would be forced to stand its ground without outside assistance.

Yet Israel holds a good stock of cards to play. Energy autarchy is the first one. The Leviathan and Tamar fields represent the opportunity for a closer cooperation with Greece and Cyprus. Moreover, if the political strains with Turkey can be solved, plans exist to build a pipeline to export gas through the Red Sea route. This is not the beginning of the solution, but a final achievement to be gained if all circumstances work favorably for Israel.

by Stefano Casertano, The European Magazine