Israel is in the midst of dealing with internal unrest while simultaneously engaging in key diplomatic discussions with Saudi Arabia and the U.S. These negotiations are especially significant as they could mark a turning point in the historic relations between Arab nations and Israel, with the potential recognition from Saudi Arabia recognizing Israel as a state. The U.S. is helping facilitate these discussions along with Saudi Arabia's proposal to boost oil production to “cement” this deal. However, a recent act of aggression from Hamas has introduced new challenges. Gaza, under the aegis of Hamas since 2007, has endured persistent economic adversities. Iran’s sponsorship of Hamas is viewed with suspicion, raising concerns about potential interferences in the ongoing Israel-centric diplomatic discussions. Although sanctions could be applied to Iran through similar pacts as JCPOA, Iran's strategic diversification of its economy since the 1980s has reduced the impact of such restrictive measures.
Simultaneously, adverse reactions from Israel could jeopardize the emerging diplomatic ties with Saudi Arabia and subsequently influence the proposed augmentation in oil output. The economic repercussions of the unfolding conflict are contingent upon its duration and scope. With the “battleground” located away from oil extraction sites, the initial 5% hike in oil prices on Monday, October 9th was a reflexive market reaction rather than a sustained trend (speculation). Subsequent days (October 10th and 11th) saw a retraction in oil prices nearing the last week’s levels. The economic outlook, particularly concerning oil prices, depends largely on the containment of the conflict within its current boundaries. An escalation spreading to other parts of the Middle East could influence a tangible shock in oil prices. However, historical context offers some reassurance; since 2007, the area has experienced four major wars and numerous minor conflicts, each lasting about a month on average, without causing prolonged disturbances in oil prices. On top of that, with winter season approaching, a seasonal dip in demand could serve as a stabilizing factor, potentially offsetting any short-term spikes in oil prices resulting from the conflict.
How does this conflict compare to the 1970s?
During the late 1960s and early 1970s, the Middle East was amidst geopolitical tensions. In 1973, the conflict escalated between the Arab (Egypt and Syria) and Israeli, known as the Yom Kippur War. With the U.S. intervention, $2.2 billion emergency financial aid package was sent to Israel, which prompted OPEC to impose an oil embargo against the U.S. This embargo brought more economic downturn in the U.S., exacerbating the already fragile economic environment partially triggered by Nixon’s detachment from the gold standard. Subsequently, the U.S. economy faced inflated oil prices, a supply shock, and severe energy shortages, exacerbating inflationary pressures and limiting economic growth—a phenomenon encapsulated in the term "stagflation."
The latest geopolitical turmoil in Israel vastly differs from the past. The U.S. currently relies less on OPEC, the EIA (U.S. Energy Information Administration) data shows a decline to 15% bpd (barrels per day) of total oil imports from 47.8% bpd in 1973, with Canada now being the predominant supplier of 52.5% bpd. In short-term, the U.S. oil supply should remain stable unless the conflict expands. Long-term effects hinge on the Ukrainian crisis and potential Israeli-Saudi diplomatic relations. As time progresses, we will continue to monitor this situation and forewarn clients of emerging challenges.