Every war has economic consequences: some profit greatly, while the multitude endure financial distress. Brace yourselves for what is to come with the war in the Middle East.
I was born in 1976 and remember vividly, my parents telling me about the ups and downs in their early years of starting a family. One story in particular happened in October 1973 when people had to wait for hours at gas stations to fill their tanks due to a petrol shortage. The lines were so long that cars in queue snaked down the street for blocks. The cause in the dip of fuel supplies was a battle between Israel and several major Arab states.
Fifty years later, down to the month and almost on the exact day, warfare emerges again in the same region. The outcome of the Israel-Palestine conflict happening now, is as of yet to be determined; but what is understood is that the same players are main actors in these latest war games that will have far-reaching consequences.
Five decades ago when the U.S. was knee deep in decades of protests from Black Power to the feminist movement, the Arab-Israeli conflict of 1973 was felt throughout the world. The clash was called the Yom Kippur War because it marked a strike made by Egypt and Syria on the Jewish holiday.
In the battle, Iraq and Jordan launched their support in a multi-military offensive to recapture land lost to Israel years before, in the 1967 Six Day War. The territory seized during that war was Egypt’s Gaza Strip and the Sinai Peninsula; the West Bank and East Jerusalem, which was Jordan’s; and Syria’s Golan Heights region. While the Arab affront proved unsuccessful in the Yom Kippur War, Israeli Defense Forces also suffered a significant amount of casualties.
During this time, Arab states were part of the Eastern Bloc. Included in this coalition of nations was the Union of Soviet Socialist Republics, commonly known as the USSR or the Soviet Union. Today, it is called Russia. Back then, the Soviet Union was enemy number one to the U.S. and the country that supplied Arab nations with the weapons to launch the first attack of the Yom Kippur War.
On the other side of the conflict, Israel was aligned with the U.S., which stood as the head of the Western Bloc. At some point, the U.S. stepped in to assist Israel with military supplies and aid, which played a large significance in their pyrrhic victory.
As a response, the Arab member-states belonging to the Organization of Petroleum Exporting Countries (OPEC) placed an embargo on petroleum. The move created over a 300 percent rise in oil prices, causing a ripple effect of shortages around the world. Included in this financial mayhem were my parents who waited in long lines for gas as they struggled to maintain their new family’s well-being.
Later on, these confederations of power—the Western Bloc and Eastern Bloc—would be called First World and Second World in the political-economics theory, three worlds theory. Created by political theorist and military strategist Mao Zedong during the Cold War, the supposition demarcated the alliances between the two superpowers—the United States and Russia. But there was also a third world: those nations who seemed to not be aligned with either.
In this current twilight zone scenario occurring in the Middle East, the U.S. backs Israel, while Russia supports Hamas, the militant Palestinian faction responsible for the attacks and kidnappings of Israeli citizens on October 7. Subsequently, the acts by Hamas sparked the current Israel-Palestine turmoil in decades-long bloody battles over territory.
For its response to Hamas, Israel launched continuous attacks on Palestine by air, land and water. At the publication of this piece, their strategy is still ongoing. This time, the casualties are mounting daily with 8,306 Palestinian deaths, many of whom are young adults and children. On the other side, there has been a count of 1,400 Jewish fatalities with hostages still held by Hamas.
As the days report more bombings and war tactics, the growing cry of a ceasefire ensues all over the world. Nonetheless, international relations intensify, which can result in a similar storyline that could very well play out with OPEC engaging in another oil embargo like that of 1973.
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Who needs oil anyway?
Here we are in a world awash in multiple wars. Much of it is over power, land, and energy resources. What is for certain, the fighting between Israel and Hamas in Palestine has caused a visible global divide.
In a speech, President Joe Biden adamantly stated the U.S. will “make sure that Israel has what it needs to take care of itself.” Already, the Biden administration deployed its newest and most advanced aircraft carrier, USS Gerald R Ford, to Israel in preparation for any more attacks.
In support of Palestine, Bolivia broke off diplomatic relations with Israel, while Chile and Columbia have ordered their ambassadors out of the region. Also, Yemen declared to enter the war by offering military assistance. From a financial point of view, if things continue to escalate, oil is sure to rise.
Indermit Gill, the World Bank’s chief economist and senior vice president for development economics, said in a statement that accompanied the report. “If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades — not just from the war in Ukraine, but also from the Middle East.”
This warning from Gill carries depth and needs to be taken seriously. One-sixth of all petrol, and one-third of all natural gas comes through the Strait of Hormuz, which is controlled by Iran, an ally of Palestine. With the current Ukraine-Russia war, and the depleted grain and fertilizer supplies from that region, the high-possibility of a gas shortage throws a wrench into a volatile world economy.
To magnify concern, Kristalina Georgieva, head of the International Monetary Fund (IMF), told an audience at the FII investment conference in Riyadh “What we see is more jitters in what has already been an anxious world.” In the end, the Average Joe, and the average family like my mother and father who were just starting out in 1973, will be the ones to suffer. Indeed, war is a game of chess and we are just pawns.
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War, money and energy
In the aftermath of significant closures of pipelines facilitating the delivery of Russian gas to Europe, the continent has been compelled to turn to the global liquefied natural gas (LNG) market to meet its energy demands. This shift has brought into focus Europe’s increasing reliance on both U.S. and Middle Eastern suppliers for its gas requirements.
Case in point, Germany recently solidified a gas delivery agreement with Oman LNG, necessitating the transport of liquefied natural gas through the strategically vital Strait of Hormuz. Also, the eastern European country secured a pivotal agreement with U.S.- based Venture Global, for the supply of LNG, effectively positioning itself as the foremost provider of liquefied natural gas to the German market. Notably, its essential to highlight that Venture Global has yet to commence construction on the infrastructure required to facilitate gas deliveries to Germany
Over the past year, the United States has played a pivotal role in meeting slightly over half of Europe’s LNG demands, with Russia and the Middle East contributing roughly 30% of the supply. If either of these latter sources were to face interruptions or substantial supply reductions, the prospects of the U.S. or alternative providers swiftly bridging the possible dearth of the resource is dubious; especially, given the current, prevailing shortage in the global LNG market. Furthermore, the potential confluence of a Middle Eastern (and potentially Russian) gas disruption in a typical or harsh winter, could have catastrophic implications for the already delicately calibrated European natural gas market.
Banking on a crisis: the possible outcomes of a shortage
The vulnerabilities present in this gas supply dynamic underscores a disconcerting reality: the Israel-Palestine conflict carries the potential to disrupt meticulously laid plans for energy security in Europe.
That said, it is imperative to emphasize the gravity of this threat, particularly as Germany and the regional economies are already grappling with the specter of recession. If it happens, the resurgence of an energy crisis, potentially more severe in nature, could inflict a crippling blow to their financial sector. Ultimately, the ramifications will highly likely reverberate across the global stage.
In the foreseeable future, central banks may embark on a bold course of action to tamper with the markets, characterized by what some describe as “monetary perversions.” While the primary objective would be to combat inflation through interest rate hikes, an additional strategy would involve implementing asset purchase programs to bolster sovereign debt (buyers of government bonds), credit, and asset markets.
To undertake this massive financial rescue operation, trillions of dollars, on a scale reminiscent of the Spring 2020 pandemic rescue, would be required. This injection of substantial capital, particularly in U.S. currency, into the global economy, is poised to exert substantial upward pressure on inflation, and potentially, introduce a more menacing threat.
In a scenario tantamount to a financial “nuclear option,” OPEC could opt to eliminate the utilization of the U.S. dollar in oil trade transactions. Such a shift would result in a sudden plunge in the demand for the greenback, and the substantial surplus of dollars, once earmarked for oil acquisitions, would inevitably repatriate to the United States. Consequently, this influx of funds would lead to an unprecedented surge in the money supply within the U.S.; thus, establishing ideal conditions for the emergence of hyperinflation.
Coupled with a sharp decline in production due to a profound economic downturn attributed to current rapid inflation, soaring interest rates, and a banking sector crisis—the ramifications of this economic turbulence would extend far beyond American borders. The ensuing chaos in the U.S. economy, and its global rumblings, could aptly be described as apocalyptic.
As many hope that the dust settles, the immediate future looks shaky. While Ajay Banga, president of the World Bank said “We were working towards a more peaceful Middle East and many countries in this region have begun to speak to each other about the opportunity of moving forward with a new platform of being together,” Banga told CNBC’s Dan Murphy, the day that peace talks start or a ceasefire commences is unknown.
Yes, these are serious times where our lives are at the whims of a button or fated to power moves in wargame strategies. What we as a people can do is pay close attention to the drama playing out before us. The reality is that nations around the world are swimming in trillions of debt that can never be repaid. State of emergencies are cash cows for governments and banks to inject currency into systems that never seem to help the people who are most in need.
In my lens, these crusades of the first and second world clashes will end up in ashes. The one percent’s historical practice of placing the most vulnerable in the front lines of economic distress and even in the military fighting, to only say “my bad, let’s work this out” after the death tolls have spiked, must be rectified sooner than later.