Written by Kourosh Harbottle
Edited by Annika Lilja
The Middle East is one of the world's top producing oil regions, including 5 of the top 10 biggest oil producers in the world. This means these countries have a significant amount of market power over the global supply chain, and this is often influenced by the political turmoil in the region, and no conflict enshrines this more than the decades long Israeli-Palestinian conflict, where oil prices and supply routes have been weaponized in order to apply pressure on the opposing parties. Whether it be the 1956 Suez Canal incident, 1973 OPEC-lead oil embargo, or other politically motivated incidents, in the context of the Arab-Israeli and Israel-Palestinian conflicts, Oil prices have been weaponized as a counter-force to more developed and advanced Israeli weaponry. However, in the context of Israel's armed conflict with Hamas, one of the most severe outbreaks of violence we have witnessed in the last decade, the economic efforts to fund the war have prompted the latest inflation of oil prices, as Israel is not an oil-producing nation, the reliance on the international oil-market along with involvement of foreign partners or enemies such as the US or Iran have made the market more vulnerable to aggressive pricing from the oil-producing countries.
The Middle East's prominence in the global oil landscape means that any regional conflict can prompt substantial fluctuations in oil prices. While Israel is not among the top oil-producing countries, its geopolitical significance and proximity to major oil reserves implicate it in the market's nervous system. Historical precedents have shown that Middle Eastern conflicts can lead to oil price surges, as seen in the oil shocks of the 1970s, where prices quadrupled in response to regional tensions. The Israel-Hamas clashes contribute to this pattern, as stakeholders anticipate potential disruptions in supply and preemptively adjust their pricing strategies.
Strategic maritime conduits like the Suez Canal, which sees passage of approximately 12% of global trade, become choke points during regional unrest. Any blockage or threat can lead to rerouted shipping and inflated costs, which ripple through global supply chains, affecting everything from petroleum to perishables. The six-day blockage of the Suez Canal in March 2021, while not a direct result of conflict, underscores the potential for significant economic consequences of such disruptions.
Market sentiment often plays as critical a role as actual supply changes in shaping oil prices. The conflict between Israel and Hamas can lead to heightened speculative activity as traders react to the uncertainty, engaging in risk-averse or opportunistic behaviors that further destabilize prices. The 2008 global financial crisis illustrated how investor psychology could exacerbate economic situations, and similar patterns are observable in how oil markets respond to geopolitical instability.
International responses to the Israel-Hamas conflict, including economic sanctions, military aid, or diplomatic pressure, can significantly impact global oil markets. These
interventions can alter the dynamics of oil supply, either constricting flow due to sanctions or ensuring it through support to key players. The Iran nuclear deal negotiations and subsequent sanctions relief in 2015 offer a recent example of how diplomatic developments can lead to shifts in oil availability on the global stage.
Persistent instability in oil-producing regions often accelerates the global transition toward alternative energy sources. The Israel-Hamas conflict, by contributing to the perceived risk of fossil fuel investments, may inadvertently bolster the case for renewable energy. In this way, regional conflicts can have paradoxical effects, undermining the current oil-based economy while promoting a more sustainable energy future.
The Israel-Hamas conflict, though localized, casts long shadows over the global economy. It incites immediate disruptions in oil prices and supply chains and influences the international community's strategic economic decisions. Furthermore, it contributes to a broader narrative that underscores the need for a diversified and resilient global energy framework. As such, the economic impact of this conflict is a poignant reminder of the interconnectedness of global affairs, where regional tensions can have profound consequences.
Sources:
Grover, N., & Ghaddar, A. (2023, October 16). What Israel-Hamas War Means for Global Oil Market. Reuters.
https://www.reuters.com/markets/commodities/what-impact-will-israelhamas-war-have-oil-2023 -10-13/
McHUGH, D. (2023, October 24). Gaza has Oil Markets on Edge. AP News. https://apnews.com/article/energy-renewables-climate-war-oil-7b0cf535f33a3b33a2bfd8a462850 ff4
Moulton, C. (2023, October 26). Revisiting the 1970s? Will the Israel-Hamas War Affect the Price of Oil and Gas in the US?. Northeastern Global News.
https://news.northeastern.edu/2023/10/24/israel-hamas-oil-prices-1970s-crisis/
New Zealand Ministry of Foreign Affairs and Trade. The Importance of the Suez Canal to Global Trade - 18 April 2021.
https://www.mfat.govt.nz/en/trade/mfat-market-reports/the-importance-of-the-suez-canal-to-glob al-trade-18-april-2021/