The military conflict between Israel and the Palestinian territories has been like an invisible economic storm, putting heavy pressure on the global economic and financial system. At first, the impact was just a breeze and rain, and investors were worried about other, more pressing issues. However, if this hostilities continue or escalate, its impact on markets could be like a huge wave, setting off spectacular scenes – not just ripples that volatile oil prices. Let us look back at history and understand the profound impact of the past Palestinian-Israeli wars on the world economy, as a mirror for us to observe the current economic development trends.
The Yom Kippur War of 1973 was the most powerful geopolitical event in the post-war period for the global economy and financial markets, like a huge black hole that swallowed everything around it. And the next Arab-Israeli conflict was like a powerful storm that stirred up the calm lake. The embargo imposed by OPEC countries on black gold supplies against countries that support Israel has caused oil prices to skyrocket nearly two-and-a-half-times. This new oil crisis not only immediately had a far-reaching impact on the entire world, like a hammer, smashing the global economy and financial markets in a new direction, but also determined the direction of the next few decades, like an invisible giant hand, dragging the world into a new era.
The current military confrontation, which began with the Yom Kippur War half a century ago, has surpassed all Arab-Israeli crises in this period, and we are witnessing a regional war of magnitude not seen in decades. Although the impact on world economic exchanges is relatively small, its far-reaching impact is already being felt. Thinking back to the previous Holy Land War, it didn't hit the stock market much at first, for example, the S&P 500 rose 5% during the war, but then fell sharply – almost 20%.
oil
The oil market is once again under great pressure, just as before. In the days leading up to the conflict, oil prices fell from a high of $95 a barrel to $85, a dramatic move that was a profound reaction to the global recession that could be triggered by an appreciation of the dollar and a sharp rise in financing rates around the world. However, in fact, in just one day, oil prices recovered most of the lost ground, and Brent crude prices approached $90 per barrel.
Clearly, fifty years have not completely repeated history. First, the wait-and-see approach of the Arab world now means that we should not expect an overly aggressive reaction from the major exporters (Saudi Arabia, the UAE, Iraq), at least for now. The global situation has also changed: if the growth in oil demand in 1973 was almost limitless, demand growth is now weaker and slower. The development of green energy has suppressed the demand for automobile fuel, and the world economy as a whole has not yet entered a stage of rapid growth. In addition, OPEC countries are generally satisfied with the current level of oil prices, and Saudi Arabia will not object to raising oil prices to $100 per barrel or more, but not too much.
However, the escalation of the conflict could complicate the situation, the most critical of which is Iran. Iran's oil production has soared to 3.1 million barrels per day in recent months. Despite this, U.S. sanctions against Tehran have not been put in place, and even some steps were taken to lift sanctions last month. If Iran were somehow involved in the confrontation and the toughest sanctions in the world were imposed on it, the world oil market could reduce the supply of as much as 1 million barrels per day, which would immediately lead to an increase in oil prices. However, Saudi Arabia and other Gulf states are likely to launch their reserve oil capacity only when oil prices are uncontrollably high. We should not forget that Iran may try to block the passage of oil tankers in the Persian Gulf, which would have a disastrous impact on the oil market.
The Republican Party in the United States has been demanding punishment for Iran, while the Democratic Party is in chaos. What happens if oil prices rise sharply (e.g. to $110 to $120)? First, the recently slowing inflation flywheel will restart. This means that large central banks will not even talk about easing monetary policy and lowering interest rates. This could lead to a "hard landing" for the US economy, not to mention European countries. The consequences will soon be felt in other parts of the world.
gas
Until the early 2010s, Israel was nicknamed "Moses leading the Jews to the only oil-free place in the entire Middle East," but in the early 21st century, the situation changed dramatically. It turns out that Israel is not without hydrocarbons, but the presence of natural gas, and large deposits found at the bottom of the Mediterranean in the country's economic zone. The two deposits, Leviathan and Tamar, have grown steadily over the past 10 years and now not only meet all domestic demand, but also have plenty to export, even competing with other countries in the international market. In 2022, Israel's gas production reached a considerable 22 billion cubic meters, of which less than 10 billion cubic meters were transported abroad, mainly in Europe. This is undoubtedly a considerable amount.
At present, the smoke of war has shrouded Israel's natural gas production. Work on the Tamar field has been put on hold, however, the larger Leviathan field is still operational. But there's a delicate picture: Israel relies on Egypt's infrastructure to export gas, but its use could be disrupted due to rising tensions between the two countries. Whatever the original intent of the conflict, Cairo is unlikely to be satisfied with the 2 million violent refugees from Egypt, and Gazans have no choice but to look to Egypt.
Europe has seen a wave of soaring gas prices, which have exceeded $500 per thousand cubic meters. This number is a rocket rise, a situation not foreseen in months. We shouldn't expect a big price increase, but once this price is fixed, it is no longer so unimaginable. Even taking into account the excessive pressure of underground gas storage facilities on the European continent, the cold winter is approaching, which will bring more troubles to the EU.
US dollars, US Treasuries, etc
With the rise in interest rates on U.S. government bonds, the dollar has strengthened significantly in recent weeks. While U.S. budget borrowing is nearing record levels, demand for these bonds is clearly inadequate. However, in the first days of the conflict, an opposite process was observed - a slight decrease in the yield on US bonds. Nevertheless, investors remain convinced that despite some problems with US fiscal policy, US Treasuries remain the most reliable tool in a crisis situation. It was like gold, soaring $50 in just a few days. However, if the conflict persists and the US is somehow involved, investors' positions could falter – especially given high inflation and rising annual debt repayments in the United States.
The beneficiaries of this conflict are undoubtedly arms manufacturers. Their share prices have risen sharply in the past few days, but as the international situation deteriorates further, companies such as Raytheon, Lockheed Martin, Boeing and others may be affected. In the coming years, they may all face the dilemma of not getting new orders.