Israel-Hamas war and repercussions for the global oil market Severe jolt to economy

The Israel-Hamas war is a multifaceted battle that has significant ramifications for the geopolitical dynamics around oil in the Middle East. Since the war unfolded, global oil market prices have significantly climbed. The deadly offensive sent tremors through the oil markets, causing prices to climb to $94 a barrel. It also reignited fears among oil traders and economists that markets could breach the $100 a barrel mark. The highest oil price on record was in July 2008, when Brent traded as high as $147.5 per barrel, according to data from LSEG.

The oil crisis fifty years ago sent oil prices rising fourfold after Arab energy ministers imposed an embargo on oil exports on the US in retaliation for its support of Israel in the 1973 Arab-Israeli war, known in Israel as the Yom Kippur War. 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. Moreover, economists are now closely studying the Middle East crisis trajectory and comparing previous regional conflicts to determine the potential scale of economic repercussions. Various financial institutions and independent experts suggest that overall commodity prices are predicted to fall 4.1 per cent in the next year, with oil prices declining to an average of $81 a barrel, down from a projected $90 a barrel in the current quarter.

Being at a critical moment, the war in Gaza threatens to spread beyond Israel and the Palestinian territories. Although Israel and Palestine are not major oil producers, there is a possibility of escalation that impacts the overall prospects of the Middle East. This region, responsible for about one-third of the world’s oil production, is now facing increased pressure with this ongoing conflict. As such, the recent skyrocketed oil prices reflect concerns about the conflict becoming a wider conflagration, which could involve Middle Eastern regional players becoming involved through their proxy agents. For example, if Iran, the main sponsor of Hamas militants, were to become involved in the crisis, oil prices may increase by $5 to $10 per barrel.

Also, technically, Iran is able to block the Hormuz Strait, which is responsible for the transit of more than 20% of the oil consumed globally and a third of the world’s seaborne gas shipments, making it a vital energy artery for the global markets. The attempt of Iran to block the strait would have major implications for Europe’s supplies of gas from Qatar, the world’s top exporter of liquefied natural gas (LNG) and a longstanding financial supporter of Gaza. In the case of a small disruption, global oil supplies will see a reduction of 500,000 barrels per day to 2 million barrels per day, a decrease rivalling that seen during the 2011′s Libyan civil war. The situation may further worsen if Qatar withholds exports in protest at Israeli military action.

Amid the raging war, Israel and Western countries blame Iran for being the mastermind of Hamas's recent brutal attack on Israel, triggering a devastating conflict. However, Iran has denied any involvement in the group's attack on Israel. Nevertheless, the US threatens to impose additional sanctions on Iran due to its alleged role in perpetrating the series of attacks against Israel, though Treasury Secretary Janet Yellen said she had nothing to announce yet on whether the United States would impose new sanctions on Iran. As for Tehran, its fear stems from the fact that additional US sanctions may significantly cut its oil exports.

Tighter US sanctions on Tehran would threaten crude supplies and push up energy prices both globally and domestically, something President Biden will be keen to avoid ahead of a 2024 election. Consequently, it would likely be difficult for the Biden administration to continue with its "permissive sanctions regime" that has allowed Iran's oil production to approach pre-2018 levels. Hence, higher oil prices, if sustained, inevitably mean higher food prices, and the latest conflict would intensify food insecurity, not only within the region but also across the world.