After covid and Russia's aggression in Ukraine, we now have the war between Israel and Hamas following the brutal attack by the Islamist group last October 7. The pandemic and the response of fiscal and monetary policies brought us persistent inflation that only begins to be controlled after large and rapid increases in interest rates. The pandemic consolidated protectionist tendencies in the world economy by prioritizing safety and the control of the production of basic goods over efficiency. The war in Ukraine accelerates protectionist and supply assurance trends, especially in the field of energy, puts geopolitical risk on 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. We remember that the 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 attack of Hamas, caused the oil embargo of the Arab countries that supported Israel This was the first major oil crisis, sending prices up 50%, slightly more than the Ayatollahs' revolution in Iran in 1978, but less than the more than 100% rise it caused the invasion of Kuwait by Iraq in 1991, according to data from the World Bank.
So far, the war has had a small impact on the price of oil (in anticipation of the containment of the conflict), but a larger impact on the price of gas. However, anticipating scenarios is difficult because an additional spark can escalate the conflict. The accident of the Sarajevo attack is remembered as the trigger for the First World War despite the fact that 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 agreements of the Sunni Arab countries were establishing with Israel. They had ignored the Palestinian question, 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. We have to think that renewable energies are still a small part of the global energy supply, that oil still dominates, followed by coal and gas. The world economy, however, depends less 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 geographical diversification in supplies. The United States is now 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 high interest rates for a time to control inflation. Another supply shock such as a substantial rise in energy prices would be very destabilizing.
