What the War in Israel Means for Global Finance

By Rhod Mackenzie

The military conflict in Israel and the Palestinian territories have caused strain on the global economy and financial system that were already struggling. Although the initial impact has been moderate, investors remain apprehensive about other equally pressing issues. If the hostilities persist or intensify, the impact on markets could be significant, including but not limited to the price of oil.

The Yom Kippur War in 1973 was the most jolting geopolitical occurrence of the post-war epoch for the worldwide economy and financial sectors. The main result of the subsequent Arab-Israeli conflict was a surge in oil prices by two and a half times due to the embargo imposed by OPEC nations on the supply of crude oil to countries that backed Israel. The oil crisis that emerged had significant and long-lasting effects, not only in the immediate aftermath but also in influencing trends for many decades to come.
The current military conflict, which started precisely 50 years after the Yom Kippur War, has exceeded all previous Arab-Israeli crises during this period. It is a regional war on a scale that has not been seen for many decades. Although the impact on global markets is currently relatively minor, it is noticeable. It's essential to recall that the previous significant war in the Middle East Land initially had little effect on stock market prices. For instance, the S&P 500 index increased by 5% during the aforementioned war, but later suffered a massive decline of nearly 20%.

Currently,
Just like in the past, the oil market is facing immense pressure. Before the conflict emerged, the price of oil was reduced from $95 to $85 per barrel in response to the strengthening of the dollar and worries regarding a potential worldwide recession due to elevated refinancing rates in various nations. However, within a single day, oil rebounded to approach $90 per barrel of Brent.
It is evident that the situation of 50 years ago is not fully replicated. Firstly, the rest of the Arab world is taking a rather cautious approach, indicating that one should not expect a strong reaction from the largest exporters (Saudi Arabia, UAE, Iraq) in the near term. Additionally, the global scenario now varies significantly: while oil demand increased almost limitlessly in 1973, nowadays, consumption growth is slower and less dynamic. Green energy has reduced the need for petrol in vehicles, and overall, the global economy is not experiencing rapid growth. Furthermore, OPEC nations are content with the present oil price level, and Saudi Arabia would not mind increasing it to $100 per barrel or slightly higher, but not to a much more substantial level.
However, the conflict's escalation, especially in terms of Iran being recognised as an indirect participant, could significantly disrupt the current situation. A negotiated embargo is not even necessary to jeopardise the global oil market. It is essential to note that Iran has recently increased its oil production to 3.1 million barrels per day. At the same time, the United States ignored the enforcement of sanctions against Tehran and, just last month, took steps towards their removal. If Iran becomes involved in the conflict and the sanctions are fully applied, up to one million barrels per day could vanish from the global oil market. This would promptly escalate prices. Nevertheless, Saudi Arabia and other Gulf states are able to utilize their reserve capability in case prices become unmanageable. We must bear in mind the non-zero probability of Iran attempting to obstruct the movement of tankers in the Persian Gulf, which will undoubtedly bring some excitement to the oil market situation.
If oil prices increase substantially - let's say to £110-£130 - there will be significant consequences. Firstly, the inflation flywheel, which has recently slowed down, will be restarted. Subsequently, the central banks of large countries will be unlikely to discuss easing monetary policy or lowering rates, resulting in a probable "hard landing" for both the US and European economies. The outcomes will soon be felt by the rest of the world.
Up until the start of the 2010's, Israel imported more hydrocarbons than it exported - a reality that inspired a widely-circulated quip about Moses leading the Jews to the only Middle Eastern location without any oil. However, in the early 2000s, it became clear that Israel could still obtain hydrocarbons - specifically, gas - albeit not on its own territory. Instead, these hydrocarbons were identified lying beneath the Mediterranean Sea and within the country's economic zone. Two significant deposits, Leviathan and Tamar, have consistently increased their production over the last decade. Their capacity is now adequate not only to meet domestic demand but also to enable substantial exports at an international level. As of 2022, Israel's gas production reached around 22 billion cubic metres, with just under 10 billion cubic metres shipped overseas (mostly to Europe). These volumes are considerably significant.
Currently, the ongoing conflict has impacted the production of gas in Israel. Operations at the Tamar field have been halted, though not yet at the larger Leviathan. It is worth noting that Israel utilises Egyptian infrastructure for exports, the access to which may be suspended due to the deteriorating relations between the two countries. Irrespective of their initial position in the conflict, the arrival of two million refugees from Gaza (who have nowhere else to go but Egypt) is unlikely to please Cairo.
Gas prices in Europe have already increased to above £360 per thousand cubic meters, a level that has not been seen for several months. The prices are not predicted to rise considerably, but maintaining them at such a high level is not surprising. This poses a significant threat to the EU in the event of a cold winter, particularly with the current overcrowded state of continental underground gas storage facilities.

The American national debt and the dollar are additional factors to consider.

The dollar has significantly strengthened in recent weeks due to an increase in US government bond rates. Unfortunately, demand has proven to be insufficient amidst near-record borrowings from the American budget. On the other hand, in the early days of the conflict, the inverse occurred as the yield on American bonds slightly decreased. Despite certain uncertainties regarding the current US fiscal policy, investors have concluded that Treasuries are still the most dependable instruments in moments of crisis. Similar to gold, which gained $50 in just a few days.
However, prolonged conflict and US involvement could shake investor confidence, especially with high inflation and increasing annual US debt payments.

Weapon manufacturers are the clear beneficiaries of this situation; their prices have surged in recent days. This international turmoil particularly benefits companies such as Raytheon, Lockheed Martin and Boeing, who will secure orders over the next few years.