From The Middle East to World Markets: How the Israel-Palestinian Conflict Threatens Energy Flows

From The Middle East to World Markets: How the Israel-Palestinian Conflict Threatens Energy Flows

The Israeli-Palestinian conflict is a complex and tragic conflict with significant humanitarian consequences. Ongoing violence and political turmoil have resulted in staggering loss of life, displacement of people, and widespread suffering. However, while some Western politicians may attempt to downplay the economic impact of this conflict, experts caution that it has the potential to send shocking ripples through the global economy, specifically in the energy markets. The conflict’s far-reaching economic implications should not be ignored, as they can exacerbate existing global challenges and further strain the already fragile world economy.

Researchers agree that geopolitical tensions pose a major risk to the global economy. Increased tensions can also have a negative impact on people’s perception of economic activities and can lead to increased social unrest and political instability. This can make it difficult for businesses to operate and discourage foreign investments.

At the same time, Hamas was launching its attack on neighboring Israeli settlements, and the International Monetary Fund announced cutting its growth forecasts for China and the Eurozone and said overall global growth remained low and uneven.

In its latest World Economic Outlook, the IMF left its forecast for global real GDP growth in 2023 unchanged at 3.0% but cut its 2024 forecast to 2.9% from its July forecast of 3.0%. The global output grew by 3.5% in 2022. Financial institutions cited the rise of global geopolitical tensions as a direct reason for deteriorating economic growth rates.

The Israel-Palestinian conflict has been a long-standing issue with far-reaching economic consequences. The ongoing struggle between the two parties not only poses a significant humanitarian cost, but also threatens to create a new economic shock to a world already suffering from various challenges.

Officials from the World Bank and IMF, who were gathering at the Moroccan Capital for the annual meeting, said that the conflict in Gaza may reflect global economic performance in the near future.

Despite attempts by US Treasury Secretary Janet Yellen to downplay the effects of war between Israel and Hamas on the global economy, financial experts predict that the development of the conflict into a full-scale war would result in “a crisis of unimaginable proportion.”

President of the World Bank, Ajay Banga, warned that the conflict was “an economic shock we don’t need” as it adds to turbulence on financial markets already convulsed by worries about ‘higher for longer’ interest rates.

One sector that is particularly vulnerable to the consequences of the conflict is the energy sector. Experts have highlighted the potential disruption of the distribution of important oil and gas supplies as a major concern. The Middle East is a significant hub for global energy production, and any escalation of conflict could have severe repercussions on energy markets worldwide.

For several decades, this region has been a major supplier of oil and gas in the global market. Countries such as Iraq, Iran, Saudi Arabia, Qatar, and the United Arab Emirates are key players in energy production and exports. However, the Israel-Palestinian conflict threatens the stability of these countries and their energy supply chains.

The rise of tension in the region brings to mind the memory of the 1973 war with Israel that triggered what came to be known as the oil crisis when Arab nations retaliated against the perceived support of their enemy, Israel, by embargoing the supply of oil to several countries around the globe. This unprecedented move sent shockwaves through the global economy, and forever altered the dynamics of global energy politics.

Following the recent escalation in Gaza, oil prices rose by 4%, reflecting concerns that the production or transport of oil could be interrupted. This tension also forced Israel to suspend production at the Tamar gas field off its southern coast and seek alternative fuel sources to meet its needs, which could also affect the amount of gas available for export to Europe during winter.

However, in the worst-case scenario, a full-scale war in the Middle East could lead to the destruction of vital energy infrastructure, including pipelines, refineries, and export terminals. Such damage would severely affect global energy supply and lead to a sharp increase in prices worldwide. In turn, this would put an additional burden on economies already grappling with the fallout of the COVID-19 pandemic.

Research by the IMF showed that a 10% increase in oil prices would dampen global output by approximately 0.2% in the following year and boost global inflation by approximately 0.4%.

Even without direct destruction, geopolitical tensions and the threat of conflict can prompt investors and energy companies to reassess their involvement in a region. This uncertainty may lead to decreased investment in exploration and production projects, thereby reducing the future supply. Moreover, countries dependent on Middle Eastern oil and gas imports seek to diversify their sources to mitigate the potential risks associated with the conflict. This diversification could further strain the energy markets and create additional economic challenges.

Moreover, the economic consequences of this conflict extend beyond the energy sector. Ongoing violence and instability in the region hinder economic development and negatively impacts trade, investment, and tourism. The constant threat of conflict discourages businesses from establishing operations or expanding their presence in the area, leading to a decline in job opportunities and economic growth.

This conflict hampers the establishment of stable economic institutions and undermines governance structures. Resources that can be allocated to economic development and social welfare are often redirected towards military expenditure, perpetuating a cycle of economic stagnation and poverty.

This conflict also impedes economic development, discourages investment, and diverts resources away from much-needed economic growth, exacerbating poverty and instability in the region. Finding a peaceful resolution to the conflict is not only crucial for humanitarian reasons, but also paramount in averting further economic shocks to the world.




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