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OPINION
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Cost of conflict: Israel-Hamas war can have a huge impact on oil prices, give a
severe jolt to economy

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COST OF CONFLICT: ISRAEL-HAMAS WAR CAN HAVE A HUGE IMPACT ON OIL PRICES, GIVE A
SEVERE JOLT TO ECONOMY


ECONOMISTS WORLDWIDE HAVE ALREADY BEEN DRAWING UP STRATEGIES TO COMBAT INFLATION
BROUGHT ON BY THE RUSSIA-UKRAINE WAR. AN INVASION THAT HAS LEFT A LASTING IMPACT
ON THE GLOBAL ECONOMY, CAUSING ONGOING DISRUPTIONS TO THIS DAY. ECONOMISTS ARE
NOW CLOSELY STUDYING THE MIDDLE EAST CRISIS TRAJECTORY AND COMPARING PREVIOUS
CONFLICTS IN THE REGION TO DETERMINE THE POTENTIAL SCALE OF ECONOMIC
REPERCUSSIONS.




Nirav Choksi
 * Updated Nov 01, 2023, 1:10 PM IST

 * 
 * 
 * 
 * 


Economists are now closely studying the Middle East crisis trajectory and
comparing previous conflicts in the region to determine the potential scale of
economic repercussions.

Crude oil prices have always been sensitive to political tensions in the Middle
East, a region that boasts the world's greatest oil wealth.

The impact of the ongoing conflict between Israel and Hamas on global commodity
markets has been limited so far. Ever since the outbreak of the Israeli-Hamas
crisis, oil prices have risen about 6 per cent while most industrial metals,
agricultural commodities, and other commodities have exhibited little to no
price fluctuations.

This has been the case up until now. But as the war wages on and as Israel’s
military expands its ground activity in Gaza, oil prices have been on a rising
spree in the last two weeks. This has set off an alarm among economists and
policymakers, reviving concerns about the war disrupting global supply chains
and commodity markets.

 Economists worldwide have already been drawing up strategies to combat
inflation brought on by the Russia-Ukraine war. An invasion that has left a
lasting impact on the global economy, causing ongoing disruptions to this day.
Economists are now closely studying the Middle East crisis trajectory and
comparing previous conflicts in the region to determine the potential scale of
economic repercussions. 

Are we headed for a severe oil price shock?



World Bank’s latest study confirms our worst fears. According to the World
Bank’s quarterly Commodity Markets Outlook report, if the conflict between
Israel and the militant group from Palestine intensifies, the global economy
will be up against a massive energy shock for the first time in decades. These
outcomes are a result of the aftermath of Russia's recent war with Ukraine as
well as the ongoing crisis in the Middle East.

The World Bank urges that a prolonged Israel-Hamas conflict risks a repeat of
the 1970s oil price crisis. Although Israel and the Palestinian territories are
not significant oil producers, the conflict is situated within a broader,
oil-rich region. Following the outbreak of the latest conflict, the Brent
benchmark—the pricing standard for over three-quarters of the world's traded
oil, surpassed $89. Globally, oil prices are anticipated to average $90 per
barrel for the current quarter.

On Monday, the World Bank issued a warning, stating that a further escalation of
tensions in the Gaza Strip with potential spillover into a wider Middle East
conflict, might result in oil prices skyrocketing by more than 75 per cent.
Under the worst-case scenario, should key producers such as Saudi Arabia cut
supplies—this might lead to oil prices reaching an all-time high of $157 per
barrel. In what the World Bank describes as a “large disruption” scenario,
similar in magnitude to the Arab oil embargo of 1973—the global oil supply could
shrink by 6 million to 8 million barrels per day. A staggering drop from the
current global oil consumption, which stands at roughly 102 million barrels each
day.

The knock-on effects on the global economy



The ongoing strife between Israel and Hamas is expected to result in increased
food and energy prices. Such a crisis could exacerbate economic consequences,
resulting in a dual shock for commodity markets globally, most of which are
still grappling with the impact of the Russia-Ukraine war.

Concerns over potential pipeline disruptions upending global supply chains,
prompted a significant spike in gas prices across Europe last month. According
to World Bank officials, the extent of the Israel-Hamas conflict and the
duration of high oil prices will determine their effect on inflation and the
global economy. A drastic oil price shock will only increase commodity prices
and intensify the existing food price inflation concerns, especially in
developing countries that are already dealing with rising levels of hunger.
Moreover, surging oil and gas prices would have a ripple effect, driving up
expenses in the shipping and fertilizer sectors. Which, in turn, would translate
into higher prices for agricultural commodities.

The way forward



The drumbeat of geopolitical headlines has resulted in oil's 30-day volatility
reaching its highest level in the past three months. India, as the world's
third-largest importer of crude oil, is carefully monitoring unfolding events.
The good news is that while oil and commodity prices are expected to spiral, the
world's economies are better equipped to weather a supply shock compared to
October 1973. This was a time when Arab OPEC members curtailed exports to
nations supporting Israel, leading to a fourfold increase in crude prices.

The Middle East's significance in global oil exports has diminished over the
past 50 years, currently accounting for approximately 30 per cent of the world's
oil supply. Down from 37 per cent in the 1970s. In case the Israel-Hamas
conflict intensifies, policymakers in developing countries will need to
formulate strategies to cope with a potential rise in inflation and interest
rates.

In light of the current supply chain challenges, enterprises and their ecosystem
of suppliers should consider adopting technology-driven trade financing
solutions offered by new-age fintech players. These solutions enable easy access
to timely funds and help businesses establish a competitive advantage in the
global trade landscape.


Views are personal. The author is CEO & Co – Founder, CredAble




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Also Read: ‘Remarkable act of restraint’: Pulitzer winner Thomas Friedman
compares India’s 26/11 response to Israel’s on Hamas

Also Read: Israel-Hamas war: Who will rule Gaza after the war? Fareed Zakaria
decodes Israel's big challenge




Published on: Nov 01, 2023, 1:10 PM IST
Posted by: Arnav Das Sharma, Nov 01, 2023, 1:01 PM IST
IN THIS STORY
 * #Israel-Hamas war
 * #OIL PRICE

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