EconomyIssue 01 - 2024MAGAZINE
GBO_ Gaza conflict

The ‘Pipeline Economics’ behind Gaza conflict

EAPC briefly gained attention in 2014 when a pipeline breach sparked Israel's biggest environmental crisis

Hamas killed hundreds of innocent people and kidnapped many others at a rave party in the Negev desert on the Israel-Gaza border on October 7, which invited a sharp retaliation from the Jewish country. But what were their real intentions? What is the economics behind the attack?

It is a secret oil pipeline running through the vast Negev desert near the Gaza Strip that is a lifeline for Israel. The infrastructure is also a potential competitor to the Suez Canal, one of the only two transit points between Europe and Asia for shipping lines that carry billions of dollars of crude oil daily.

The 158-mile pipeline connects Israel’s oil refineries to the Red Sea coast. Hamas and Houthis, who are targeting pipeline choke points in Israel, see everything that boosts the Israeli economy as a threat.

Before a catastrophic oil spill a few years ago, Israel’s state-owned Eilat Ashkelon Pipeline Co., now the Europe-Asia Pipeline Co. (EAPC), was the country’s best-kept national secret.

However, EAPC may become the world’s leading oil transport system, supplying Israel, and safely transporting billions of barrels of oil from the Middle East to Europe and the rest of Asia.

Sense in the senseless

Iranian ships heading to Europe would carry oil to Eilat, Israel’s southernmost tip, on the Red Sea. Ashkelon, a Mediterranean city 5 kilometres north of northern Gaza, received the oil from there. The pipeline crossed Egypt’s 200-kilometre-wide Sinai Peninsula, separating it from the Suez Canal.

The 1979 Iranian Revolution ended this possibility and changed Israel-Iran relations. Israel briefly let Iranian oil into the pipeline following the revolution. After that, the two nations became each other’s enemy.

EAPC briefly gained attention in 2014 when a pipeline breach sparked Israel’s biggest environmental crisis. The EAPC pipeline died again until the 2021 Abraham Accords with the UAE, Israel, and Bahrain. Israel and the UAE discussed the Red Sea-Mediterranean EAPC oil pipeline. This pipeline’s operations have been kept secret by Israeli officials.

Major historical events like the Soviet-Afghan struggle, the Azerbaijan-Armenia rivalry, the Russia-Ukraine conflict, and the Israel-Hamas war occurred along significant trade corridors, which intersect the seven global choke points.

What is the attack tactic and whose hands are the boorish radicals? Iran, Qatar, Russia, and China would rejoice if Israel’s oil pipeline and Eilat project were destroyed because they threatened their dominance over regional routes.

How can EAPC alter oil transport dynamics?

EAPC can store roughly 23 million barrels and process 600,000 barrels per day. The Suez Canal and Egypt’s Sumed pipeline transfer 2.5 million barrels of Gulf oil to Europe daily. Only 10% of EAPC’s capacity is in the same pipeline.

EAPC’s ability to accommodate VLCCs (Very Large Crude Carriers) that can carry 2 million barrels of oil is a highlight. However, the 150-year-old Suez Canal can only accommodate Suezmax vessels with half the capacity of a VLCC due to its depth and width.

Oil traders that lease two ships through the Suez Canal will now pay for one VLCC ship through Israel. With Suez one-way rates rising from USD 300,000 to 400,000, the EAPC pipeline can provide its customers with a significant economic advantage.

Before recently, ships mooring at Ashkelon (Northern Israel) could not access GCC ports, forcing EAPC’s customer shipping businesses to use several registrations and other methods to hide their identity. Israel never disclosed too many EAPC specifics since it would have affected its consumers.

Israel’s sharing of earnings with Iran contributes to EAPC’s secrecy. In 2015, a Swiss court ordered Israel to pay Iran USD 1.1 billion for their joint ownership of the EAPC pipeline earnings. Israel disobeyed this compensation ruling. The current Iranian regime refuses to collaborate with Israel; thus peace and profit sharing are unlikely.

Regional corridor control war

Seven geographical maritime choke points shape the world’s strategic terrain in the complicated web of global geopolitics. Three of these critical choke spots are in the Middle East, complicating the region’s problems. This is why the Middle East is always unstable.

International supply chains and maritime transportation depend on the Suez Canal, Bab El Mandeb, and Strait of Hormuz in the Middle East. Two choke points are near Israel and one is near UAE.

Around 50 vessels sail through the Suez Canal daily. Approximately 47 ships pass El Mandeb every day. Strait of Hormuz: Nearly 20% of global oil passes through here.

Even with modern technology, 80% of global trade relies on maritime shipping routes. This makes the choke points above more important.

Egypt’s Suez Canal Economic Zone signed a USD 6.75 billion deal with China Energy in October despite the 2020 disruption. Qatar will invest USD 5 billion in Egypt. Egypt rarely receives such large foreign investments.

Egypt and Israel have developed close ties in recent decades, affecting regional geopolitics. The full operational capacity of the Eastern Mediterranean Pipeline Company (EAPC) will threaten this relationship.

This project is controversial because it will drain 10–12% of Egypt’s lucrative Suez Canal commerce. The possible effects extend beyond Egypt’s borders, worrying China and Qatar, which have Suez Canal interests.

Israel must handle this difficulty without jeopardising its delicate diplomatic relationship with Egypt, its neighbour, for trade. Israel must delicately balance regional stability and energy security.

EAPC can carry oil unloaded in Ashkelon from Azerbaijani and Kazakh ships to Gulf of Aqaba tankers. These tankers will travel to China, South Korea, and other Asian countries. This dynamic affects energy trade and geopolitics.

Azerbaijan’s commerce and military alliance with Israel make it stand out. While strategically helpful, this link complicates regional geopolitics. Iran supports Armenia, Azerbaijan’s historical foe, due to their long-standing trade and connections.

The International North-South Travel Corridor (INSTC) connects Russia to Iran via Azerbaijan and India, facilitating goods travel across Asia. Armenia and Azerbaijan are key players. Russia is the most sanctioned nation and Iran is somewhat better, making INSTC preservation crucial. This important corridor is unlikely to attract competition.

The Indian Middle East to Europe Corridor emerged amid these complex geopolitical dynamics. India-Middle East-Europe trade and connectivity benefit from this corridor. Israel, the UAE, and Saudi Arabia dominate the Middle East segment. Regional tensions will rise as IMEC becomes INSTC’s strategic adversary.

This geopolitical chessboard shows how Azerbaijan and Armenia’s problems affect continents and the Israel-Hamas war. It illustrates the complex relationship between regional conflicts and global geopolitics, where every move has repercussions that affect worldwide relations.

The endgame

If Iran damages the Eilat and Ashkelon pipeline, it can avenge its business loss through EAPC, worsening the problems faced by Israel, the UAE, and Saudi Arabia.

While the Israel-Hamas conflict has stretched the United States thin, its naval assets are concentrated in CENTCOM, which includes the Middle East. This geopolitical realignment forces the US to prioritise Israel over Ukraine and other global issues. Russia can profit from this shift in focus since it matches its interests.

Qatar and China, two silent but influential actors, will have major consequences in this instability. If the EAPC reaches full capacity, its Suez Canal investments will suffer. This disruption might affect numerous businesses and escalate international tensions.

The media portrays the Israel-Hamas war as a civilisational clash. But is it? All players are protecting their business interests. War of passageways!

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