After the covid and Russia's aggression against Ukraine, we now have Israel's war on Hamas after the brutal attack by the Islamist group on October 7. The pandemic and the response of fiscal and monetary policies brought us persistent inflation, which only begins to be controlled after large and rapid increases in interest rates. The pandemic consolidated protectionist tendencies in the global economy by putting security and control of the production of basic goods ahead of efficiency.
The war in Ukraine accelerates protectionist and supply-securing trends, especially in the field of energy, puts geopolitical risk center stage, and further divides the world between the West and China, with its growing sphere of influence in competition with the United States.
What can we expect from the war between Israel and Hamas? Naturally, it will depend on whether it spreads or remains contained. Let us remember that armed conflicts in the Middle East have generated large increases in the price of oil. The region has half of the world's estimated oil reserves and produced a third of the oil last year and about 20% of the world's oil supply passes through the crucial Strait of Hormuz.
The Yom Kippur War, which began on October 6, 1973 with the attack of Egypt and Syria, fifty years before the Hamas attack, caused the embargo of oil from Arab countries to those who supported Israel. That was the first major oil crisis, which raised prices by 50%, a little more than the Ayatollahs' revolution in Iran in 1978, but less than the increase of more than 100% caused by Iraq's invasion of Kuwait in 1991, according to data from the World Bank.
For now, the war has had a small impact on the price of oil (in anticipation of the containment of the conflict), but a greater impact on the price of gas. Still, anticipating scenarios is difficult because an additional spark can escalate the conflict. The accident of the Sarajevo attack is remembered as a trigger for World War I although the great powers did not want it and it seemed unthinkable.
We already have open war in Ukraine, with Iran directly helping Russia and China, more indirectly. Now Iran controls Hizbullah in Lebanon, helps Hamas, and has managed to break the circle that the Sunni Arab countries' agreements with Israel were establishing. These had ignored the Palestinian issue, which is now back on the table.
In a scenario of general escalation of the conflict, the Strait of Hormuz could be closed and the consequences would be very serious for the world economy. It must be remembered that renewable energies are still a small part of the global energy supply, which oil still dominates, followed by coal and gas. However, the world economy is less dependent on it than in previous Gulf crises. For example, to produce one unit of GDP we need less than half as much oil as in 1970, and there is more geographic diversification in supplies. Now the US is self-sufficient after the shale revolution and even exports energy.
The resilience of the global economy will be tested by future turbulence in a context of very high deficits and public debt and with long-term high interest rates to control inflation. Another supply shock such as a substantial rise in energy prices would be very destabilizing.
