adminAny possible escalation of the Israel-Hamas war poses a major risk to the global economy, driving up energy prices and disrupting key trade routes, economists have warned.
Diplomatic efforts from a slew of international powers have intensified in the hope of containing the fallout from the October. 7 attack on Israeli civilians by Palestinian militant group Hamas.
Israel’s subsequent bombardment of Gaza in a bid to eliminate Hamas has increased the risk of a spillover to the wider Middle East region.
Israeli President Isaac Herzog said Tuesday that while Israel does not want a war with Lebanese militant group Hezbollah, which has recently exchanged fire with Israeli armed forces in the north of the country, Lebanon will “pay the price” if the two countries end up in a full-scale altercation.
The events in recent days have deepened the greatest fear among economists, that the conflict engulfs the region and begins to pose a long-term threat to global energy and trade infrastructure.
“Any Middle East conflict sends tremors throughout the world economy because the region is one, a very crucial supplier of energy, and secondly … it is the key shipping passageway for global trade,” Pat Thaker, director of the Middle East & Africa region at the Economist Intelligence Unit, told CNBC today.
The extent to which oil prices will rise, and the knock-on impact to the global economy, will be directly proportionate to how geographically contained the conflict becomes, Thaker explained, adding that the oil market is already tight in the aftermath of Saudi-driven OPEC+ production cuts.
She also noted that the war has begun at a time of “enormous economic uncertainty” as the war in Ukraine continues to rage and central banks reach a tipping point in their monetary tightening cycles.
“For economies that are already in or heading for recession, further hikes from the Fed and the ECB could tip them over the edge,” Thaker told CNBC via videolink.
“We’re going into it with a double whammy here: higher prices once again for energy, but also inflation softening but not radically coming down at a time when interest rates are also the highest we’ve seen in a number of years.”
Oil prices initially leapt after Hamas launched its surprise attack on Israel before moderating slightly, though Brent crude futures were still trading near US$89 per barrel yesterday morning in Europe while West Texas Intermediate futures hovered just below US$84 per barrel.
In the “extreme scenario” of a regional escalation, Thaker predicted, markets will have to contend with Brent over US$100 per barrel for a sustained period, which “means higher global inflation, softer economic growth” and “pretty much recession conditions.”
In a research note Friday, strategists at J. Safra Sarasin said oil production from Iran, the world’s eighth largest producer of crude, would be at risk in the event of an escalation, particularly if Tehran is subjected to a renewed tightening of US sanctions, which they estimate would remove up to 1 million barrels a day from global output.
“On top of that, a rise in uncertainty over supplies from Saudi Arabia may easily see prices surge to the same extent as they did in response to the Ukraine invasion in 2022. Back then oil prices gained 30 percent in a matter of two weeks before settling at around 15 percent above pre-war levels,” said J. Safra Sarasin Equity Strategist Wolf von Rotberg.
The Middle East is home to the world’s busiest shipping routes, including the Suez Canal, the Red Sea, the Persian Gulf and the Strait of Hormuz, heightening the economic peril associated with escalation. — CNBC.
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