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

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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