New oil war could be looming – what would that mean for Scotland?

My old friend the late John Erickson of Edinburgh University – a discreet interlocutor between the US and Soviet military – told me about being woken in the middle of the night by a hysterical Pentagon contact, who informed him the Israelis had opened their nuclear missile silos.

The West saved Israel with a massive arms airlift, thereby incurring the wrath of the Arab states. Israel won the war eventually but the Arab oil producers, organised in the Opec cartel, retaliated by imposing a petroleum boycott on the Western nations.

The price of oil quadrupled and world stock markets crashed. The result of this “oil shock” was a global recession coupled with a huge spike in inflation throughout the 1970s. The world has never been the same since.

Is history about to repeat itself? Oil prices have surged on the possibility Israel will respond to the latest Iranian missile strikes by retaliating against Tehran’s vulnerable petroleum and energy infrastructure. Brent crude from the North Sea, the main benchmark price, was trading at $78 a barrel on Friday, up 9% in a week.

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Despite sanctions, Iran remains a key player in the global oil market – which more than hints at Western hypocrisy. Iran produces around four million barrels of oil per day, or roughly 4% of global supply. Take that out, and petroleum prices will jump further.

Goldman Sachs, the international bank, reckons that even a one million barrel per day drop in Iranian exports will boost oil prices next year by around $20 per barrel.

But that’s only half of it.

If Tehran counters by closing the Strait of Hormuz – through which passes oil from Saudi Arabia and the Gulf states – it will take out fully one-fifth of the world’s oil supplies and double the price of crude to $150 a barrel.

For the past year, oil price movements have been largely docile despite the conflict in Gaza, Israel and now Lebanon. This is because the Saudi-led Opec countries have already cut production in order to boost prices.

Paradoxically, there is plenty of spare capacity in Saudi Arabia and the UAE that could be brought back online to replace any lost Iranian oil. Or so everyone thought. However, there is no sign that the Saudis are going to play ball. In fact, Riyadh and Tehran have been engaged in something of a political rapprochement recently. Suddenly, the energy markets are waking up to the possibility of a Second Oil War.

(Image: PA) It’s an old game to predict humongous oil price rises, only to see normality instead. Analysts and forecasters love a bit of drama. However, if Israeli prime minister Benjamin Netanyahu and the country’s war cabinet decide to punish Tehran, anything is possible.

Destroying Iran’s well-protected nuclear processing facilities would be difficult (though presumably the Israelis have been pondering the matter for several decades). But pulverising Iran’s main oil terminal on Kharg Island would be relatively simple. That would take out 1.7 million barrels of daily exports.

In turn, Tehran might decide to bring the house down by disruptingdisrupt tanker traffic in the Strait of Hormuz. It only requires a few rubber boats armed with rocket projectiles.

Just the threat would be enough to send petroleum prices into orbit, even if we got the tankers through, protected by lumbering British and US aircraft carriers.

The potential negative impact on the global economy has sent cold shivers through most Western governments. “If I were in their shoes, [the Israelis], I’d be thinking about other alternatives than striking oil fields,” a worried president Joe Biden warned on Friday, at a rare White House press briefing.

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No wonder: spiking oil prices would send inflation back up again just in time to re-elect Donald Trump. However, Netanyahu has long since stopped listening to Biden.

If Israel does take out Iran’s oil industry, the first impact will be on China, not the West. China imports 15% of its oil from Iran – the bulk of Iran’s foreign sales. Effectively, Chinese cash-for-oil keeps the Iranian regime in business.

Doubtless China could replace that petroleum eventually but only by outbidding everyone else. Result – inflation everywhere and an increase in tension with Beijing. Imperceptibly but remorselessly, the various strands of global insecurity are weaving together.

What of the UK? Here, the new Labour Government is trying to restore its credibility by going

hell for leather for carbon net zero. That is a necessary goal at a global level but for the UK to plunge on regardless of current energy uncertainty is perhaps a mite foolhardy. We are embracing energy vulnerability at the expense of national security.

Last week saw Keir Starmer, Rachel Reeves and Ed Miliband suddenly discover £22 billion to spend on carbon capture and storage (CCS) projects in England. So much for the budget black hole.

But mark this – if oil prices do shoot up, the cost of CCS will become insanely prohibitive.

In the current dangerous political climate, CCS could become Labour’s HS2.

Here in Scotland, we have just seen confirmation of the decision to close the Grangemouth oil refinery and rely on imported petroleum products to put in our motor cars and fill the tanks of aircraft at Edinburgh Airport. If the price of world crude goes up, expect international oil refiners to add on their own premium.

Across the globe, many older, less-efficient refineries are closing in the face of competition from new, super refineries in Asia. Expect these monopoly refiners to push up their profit margins if the global oil market is in turmoil.

Closing Grangemouth will prove to be a strategic security nightmare for Scotland. Perhaps Ian Murray could use his time as Secretary of State for Scotland to help keep Grangemouth open?

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Nobody can predict the future of oil prices for next week, never mind years ahead. But we can say safely that there has never been this level of uncertainty, or this prospect for calamity, in half a century.

Which are grounds for Scotland controlling its own energy future. How would it use that control? Certainly – especially if world crude prices rise – to use Scottish oil and gas export sales to fund both a just transition and keep energy bills lower for local consumers and businesses. Simply closing down North Sea and Atlantic production would be a pointless, utopian gesture.And higher crude prices would bring extra revenue to an indy Scottish government.

Scotland’s notional share of UK North Sea tax revenue increased in 2022-23, to near record highs of £8bn. It fell back in 2023-24, as prices and output slipped, yielding £5bn. A prolonged period of crisis in the Middle East would bring us back to nearer the higher figure, or more.

Of course, these gyrations demand that oil revenues should be invested in a sovereign wealth fund rather than splurged on revenue spending. Either way, the prospect of a Second Oil War only reinforces the need for Scotland to own and control its own energy destiny.