Why A New Conflict In The Middle East Could Send Shockwaves Through Global Markets…

In response to Iran’s recent missile attack on Israel, which involved firing approximately 200 ballistic missiles, Israeli Prime Minister Benjamin Netanyahu has vowed that Iran “will pay for it.”

Israel’s military, with assistance from the U.S., was largely successful in intercepting most of the missiles, but a few hit targets in Israel, including in central and southern areas.

This attack, part of escalating tensions between the two nations, was in retaliation for Israel’s earlier operations against Hezbollah and the assassination of key figures like Hassan Nasrallah and Brig. Gen. Abbas Nilforoushan.

Israel is preparing a significant retaliation, with military officials stating they are ready to respond “wherever, whenever, and however” they choose.

Given the scale of the Iranian attack, Israeli retaliation is expected to be more forceful than in previous instances, potentially targeting Iran’s nuclear infrastructure, military sites, or energy facilities.

Some Israeli officials, including former Prime Minister Naftali Bennett, have urged for more decisive action against Iran’s strategic assets, which could reshape the balance of power in the region.

If a full-scale war were to break out between Israel and Iran, the economic implications, particularly concerning oil, could be significant, with parallels to the 1970s oil crises.

This is what could happen…

1) Iran is one of the largest oil producers in the world and controls the Strait of Hormuz, a critical chokepoint through which roughly 20% of the world’s oil passes.

Any conflict that affects the flow of oil through this strait could severely disrupt global oil supply, leading to sharp increases in oil prices.

In the 1970s, the oil crisis following the Yom Kippur War and the Iranian Revolution led to skyrocketing oil prices, contributing to global stagflation — high inflation combined with stagnant economic growth.

A similar supply disruption today could trigger another oil price shock, given how critical Middle Eastern oil remains to the global market​

2) A spike in oil prices would lead to increased costs for energy and transportation globally, directly contributing to higher inflation.

This would particularly affect energy-dependent economies, and given the current inflationary pressures in many parts of the world, it could push central banks to raise interest rates further, slowing down economic growth.

The 1970s saw a surge in inflation due to oil price hikes, and many countries struggled to cope with rising costs of production and transportation.

A similar outcome could be expected in the event of major oil supply disruptions from the Middle East.

3) With energy prices rising, the cost of living and doing business would increase across various sectors, potentially leading to reduced consumer spending and investment. As happened in the 1970s, these factors could push major economies into recession.

Global trade could also be affected, as increased shipping costs and instability in the Middle East create further supply chain disruptions, adding to the economic fragility seen post-pandemic.

4) Countries highly dependent on oil from the Middle East, particularly Europe, China, and India, would face energy security concerns.

This could accelerate moves to diversify energy sources, increasing investment in renewable energy and seeking alternative suppliers.

In response to the 1970s crises, many Western nations shifted their energy policies, investing in nuclear and renewable energy to reduce reliance on Middle Eastern oil.

A similar strategic shift could follow another oil supply shock, potentially speeding up the energy transition toward sustainable energy sources.

5) An all-out war would likely lead to significant volatility in global financial markets.

Oil companies might see surges in their stock prices, but sectors reliant on cheap energy — such as manufacturing, transportation, and consumer goods — would suffer.

Investors could move toward safe-haven assets like gold, similar to market reactions during the 1970s oil crises​.

6) Economies in the Gulf region, especially oil-exporting nations like Saudi Arabia, Kuwait, and the UAE, might experience short-term benefits from increased oil prices, but the longer-term impact of regional instability could hurt their economic interests.

The risk of regional spill over and attacks on energy infrastructure (such as oil fields and refineries) would increase.

In the 1970s, oil-exporting nations experienced windfalls, but those benefits were short-lived due to subsequent geopolitical tensions and the global economic downturn that followed.

https://www.nytimes.com/2024/10/02/world/middleeast/iran-missile-attack-israel-war.html