The Israel-Hamas war has a ripple effect on global markets, particularly in the oil sector. Economists and market strategists closely monitor the situation to see if it escalates further and draws in other countries. This could drive up oil prices and cause investors to seek safe havens.
Israel is preparing for a ground assault in the Hamas-controlled Gaza Strip, and there are concerns about a potential war on a second front with Lebanese militant group Hezbollah. These developments have led experts to predict a large-scale loss of life and market reaction.
The conflict has already impacted asset prices, contributing to a stock decline, such as the S&P 500. On the other hand, safe-haven assets like gold have seen increased demand, with prices rising by more than 3% on Friday.
The U.S. dollar has also strengthened, reaching a one-week high. Oil prices have surged nearly 6% as investors evaluate the potential impact on oil supplies in the region, which is a significant oil producer.
According to Bernard Baumohl, chief global economist at The Economic Outlook Group, a widening conflict would likely lead to economic consequences, including inflation and higher interest rates globally.
However, Baumohl noted that the United States could be an exception as foreign investors seek to invest in the country as a haven during global conflict, potentially leading to lower interest rates and a strengthened U.S. dollar.
The impact of the war extends beyond oil prices, as seen in the recent suspension of Chevron’s natural gas exports through a major subsea pipeline between Israel and Egypt.
The specter of a broader conflict in the Middle East raises concerns among finance ministers and officials, who warn of significant economic ramifications as the world is recovering from the COVID-19 pandemic and the Ukraine war.
In a recent IMF and World Bank meeting in Morocco, the finance ministers highlighted the potential consequences, including higher energy prices leading to inflation and a decline in confidence.
Kristalina Georgieva, the head of the IMF, referred to the situation as a “new cloud” on the outlook for the global economy, reflecting the lukewarm medium-term prospects discussed at the meeting in Marrakech.
Jamie Dimon, Chief Executive of JPMorgan, expressed similar concerns, calling it the most dangerous time the world has seen in decades.
Officials have warned that the main economic risk after October 7th is the potential for the conflict in Israel and Gaza to escalate into a broader regional conflict. This could damage confidence and produce a fresh wave of inflation in economies still recovering from previous price shocks.
The International Monetary Fund (IMF) has stated that a 10% increase in oil prices could raise global inflation by approximately 0.4 percentage points. Gita Gopinath, the IMF’s Deputy Head, highlighted the numerous shocks the world is currently facing, including the Middle East conflict and its potential impact on energy prices.
Gopinath pointed out that high levels of debt, combined with a long-term low-interest-rate environment, create significant risks.
Oil May Effect Inflation
Paschal Donohoe, the Head of the Eurogroup, expressed concern about the conflict’s effect on inflation expectations and its implications for reducing price pressures in 2024. He predicted that Europe would continue to experience growth during the battle, albeit slower than anticipated.
The global economy’s medium-term growth is now expected to be relatively weak, with a projected growth rate of just 3.1% in 2028. This compares to a pre-pandemic five-year outlook of 3.6% growth and a 4.9% growth rate before the financial crisis.
According to the IMF, over 80% of economies face worse prospects than 15 years ago due to slower productivity and population growth.
Furthermore, a growing trend of global economic fragmentation into competing blocs is fueled by geopolitical tensions.
https://unsplash.com/photos/GrmwVnVSSdUThis process is challenging to reverse and could lead to further financial setbacks. The IMF estimates that trade barriers alone could decrease global economic output by up to 7% in the long term.
The rising conflict is causing significant disruptions to global supply chains. In addition to this, there are increasing fiscal risks as the international public debt ratio approaches 100% of gross domestic product by the end of the decade.
This has raised concerns about the sustainability of debt at an inconvenient time.
The recent fluctuations in the U.S. Treasuries, the world’s largest financial market, have increased global borrowing costs just as central banks were reducing their balance sheets and government debt issuance was rising.
This complex set of circumstances poses challenges and uncertainties, as emphasized by Christine Lagarde, president of the European Central Bank.
Following a surprise attack by the militant group Hamas, oil prices surged more than 3%. However, the impact on oil and gas prices is expected to be limited unless the conflict escalates into a regional war involving third parties such as the U.S. and Iran. As long as the violence does not spread, U.S. gas prices will likely remain unaffected.
American drivers have not seen any significant effects of the conflict on gasoline prices, which have been trending lower. Downward pressures, such as the jobs report and potential interest rate hikes by the Federal Reserve, are anticipated to continue softening oil prices.
Furthermore, the ongoing hostilities are not comparable to Russia’s invasion of Ukraine. As Russia is a significant oil and gas exporter, it impacts global energy markets differently.
However, heating oil prices are expected to rise due to seasonal changes as demand increases with dropping temperatures. Diesel, prominently used as heating oil in the Northeast, is entering its peak season.
At present, U.S. drivers planning major road trips in the coming months should not be overly concerned about the conflict’s impact on fuel prices. Nevertheless, it is advisable to monitor the situation, especially if the turmoil escalates, for those who are price-sensitive.
Written by Janet Grace Ortigas
Jerusalem Post: Oil prices leap as ripple effect from Israel-Hamas war seen on global markets
Financial Times: Fears of broader Middle East conflict cast a shadow over the global economy; By Sam Fleming and Colby Smith
CNN: Israel warns of a new phase in war on Hamas, as Gaza civilians flee and Israeli troops gather near border; By Jessie Yeung, Kareem El Damanhoury, Eyad Kourdi, et al.
CNBC: Israel-Hamas war causes oil prices to spike. Here’s what drivers in the U.S. need to know. By Ana Teresa Solá