“Israel is at war” – a war that could again disrupt the world economy just like the Russia-Ukraine war did, as it involves some of the most powerful players of the world - Israel, Iran and the United Nations.
It is not unknown to anyone that the Middle East lies at the heart of the world oil trade. About one-third of the total oil supply comes from this oil-wealthy region, also home to key shipping passages. This is why the Middle East fray brings tension to international trade.
A Historical Mention
Take the example of the Arab-Israeli war of 1973. The Middle Eastern countries involved in the war imposed an oil embargo which ceased US imports of oil and led to a quadrupling of oil prices from $2.90 a barrel in October 1973 to $11.65 in January 1974.
Impact On Oil Prices
The Middle East countries have always used oil as their weapon, and this time would be no exception. The short-term effects of the war are still visible as the crude oil prices continue to surge, with both Brent Futures and U.S. West Texas Intermediate crude oil rising to more than $3 per barrel within a week of the conflict.
Source: BNN Breaking
However, most economists believe that this is just because of the expected fears of the people and disruptions in the oil market due to the strife. But it would be no better if the war escalates to regions like Iran – which is both a chief member of the Organization of the Petroleum Exporting Countries (OPEC) and a capable player in handling operations at the Strait of Hormuz – an important oil artery carrying a fifth of the global oil traded at sea. Apart from this strait, another important choke point is the Suez Canal which is a significant route for energy, commodities and componentry from Asia and the Middle East to Europe. Any effect of these will lead to an adverse impact on global trade.
Increasing Risk Insurance Premiums And Reducing Profitability
As such, there is also a chance of higher insurance premiums on export credit for exporters, impacting bilateral trade of merchandise. There is also a chance of reduced profitability for importers and exporters.
Catalyst For Deglobalization And Breaking Of Trading Ties
Source: United Nations
Israel-Hamas war is being seen as a factor that could lead many nations to adopt protectionist policies, aimed at restricting trade, against the troubled nations to shield their domestic economies. There is also a strong indication of reversing and restructuring of trading ties between nations such as the India-Middle East-Europe Corridor Project. Countries such as the US are relocating their trade by relying less on potentially hostile nations and sourcing products from other areas.
The effect of the conflict is not as grave yet; however, all eyes are on the participation of other key players like Iran which would be a catastrophe.
References:
1. What Israel-Hamas war means for global oil market | By Natalie Grover and Ahmad Ghaddar
2. How the Israel-Hamas war could affect the world economy and worsen global trade tensions | Daniele Bianchi
3. How will the Israel-Palestine war impact financial markets? | Sonam Srivastava
4. Israel-Hamas war risks further deglobalization and inflation
Analysis by Bryan Mena, CNN
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