Cooperation between developed nations fractures as prospect for wider crisis looms
A deadly explosion at a Gaza hospital drove oil prices to their highest level since the outbreak of war between Israel and Hamas on Wednesday.
The blast derailed a US diplomatic effort in the region led by Joe Biden and triggered renewed concerns about supply disruption.
Brent crude rose as much as 3.5pc to touch $93 a barrel, while fears increased of a wider conflict in the Middle East.
Prices eased after US intelligence suggested Gazan terrorists were responsible, though a peace summit with the leaders of Jordan, Egypt and the Palestinian Authority was cancelled even as the US president met Israeli leader Benjamin Netanyahu.
Oil prices had already risen by more than a quarter since mid-June amid supply cuts by Saudi Arabia and Russia.
However, investors have become increasingly nervous after Iran’s foreign minister called for an oil embargo against Israel.
Hossein Amir-Abdollahian said earlier this week that escalation of the war was “inevitable”.
The Middle East accounts for more than a third of the world’s seaborne oil trade and the International Energy Agency said last week that markets were likely to remain “on tenterhooks as the crisis unfolds”.
Amrita Sen, the director of Energy Aspects – which advises over 500 companies globally – warns that prices could surge suddenly if the conflict broadens.
She says: “Should it escalate and should there be an impact on Iranian supplies, the price action becomes very binary. So either we kind of stick around [$93 a barrel] or we could easily escalate to $120-$140.
“Iran is a big producer of oil. It exports about 1.8 million barrels per day and produces more than three million barrels per day. It’s a major oil supplier to the market. Even though it is under sanctions it still manages to sell about 1.8m barrels per day to China.”
Gold prices have also jumped amid a surge in demand for safe assets. The precious metal increased by as much as 1pc on Wednesday to $1,943 an ounce and has soared by as much as 7.6pc since Hamas’ first attack.
Jonas Goltermann at Capital Economics says it’s a clear sign investors are nervous.
He says: “There’s no real good reason to buy gold except if you’re worried about really bad outcomes.”
Fears of stubborn inflation have also rattled bond markets, pushing yields on benchmark 10-year US Treasuries to a 16-year high amid bets that interest rates in the world’s biggest economy will stay higher for longer.
The potential for an escalation of the Israel-Hamas war is “vast”, says international security expert Nomi Bar-Yaacov, who is an associate fellow at Chatham House and has held many posts at the UN.
“The more civilian casualties there are in Gaza, the more Arab public opinion is going to feel their governments are not doing enough,” she says.
“I think there’s going to be an awful lot of street violence, and governments are going to come under pressure and then you’ll have individual, very, very wealthy donors from different countries in the Gulf putting money into those who are willing to attack Israel.”
Some have compared the unfolding conflict to Syria and Egypt’s attack on Israel almost exactly 50 years ago in what became known as the Yom Kippur War.
Back then, Arab states responded to America’s support of Israel by suspending oil shipments to nations that supported it, including the UK.
The embargo slashed oil supplies by 14pc around the globe and sent US petrol prices up by as much as 40pc. Prices soared as consumers across the world panicked over oil shortages.
The episode led to President Nixon announcing a swathe of new energy policies and a goal of US energy independence.
Since then, a fracking boom has added millions of barrels per day to US production, reversing a nearly three-decade decline, enabling the US to become a net exporter of petroleum in 2020 for the first time since 1949.
Ayhan Kose, the World Bank’s deputy chief economist, says this is one reason why the world is a very different place compared to 1973.
“The nature of economies’ dependence on oil is different,” says Kose. “There are a much larger set of suppliers and a much larger set of alternatives out there.
“Relative to the 1970s, it’s a different type of shock. That was really an extraordinary response, the embargo, the very high prices.”
But in other respects, the world is in a much more dangerous place, says Kose. Policymakers have dealt with a series of economic shocks since 2020 that started with the pandemic.
Russia’s invasion of Ukraine unleashed a wave of inflation that policymakers are still grappling with after delayed interest rate rises.
The International Monetary Fund warned last week that the Middle East conflict represented a “new cloud darkening” over the global economy.
It estimates a 10pc rise in oil prices raises global inflation by roughly 0.4 percentage points a year later.
Capital Economics has previously estimated that if global oil prices rose to $150 a barrel, inflation would be one percentage point higher in 2024.
The risk of a third wave of inflation will be unwelcome at a time when every central bank in the G7 is dealing with inflation running above their 2pc targets.
“Given inflation has already been above target for the last two years, a fresh inflationary spike could well lead expectations to become unanchored,” say Henry Allen and Cassidy Ainsworth-Grace at Deutsche Bank.
Many countries were left mired in debt after Covid lockdowns, leaving them with less financial firepower to deal with fresh economic shocks.
Global cooperation on issues from trade to security is also fracturing.
Last week, a G7 communique by finance ministers and central bank governors from the group of rich nations was delayed by an hour after Japan raised concerns about the language used in the joint statement.
Leaders of the wider G20 group didn’t mention the Israel-Hamas war at all.
Kose says this has left the global economy in a precarious position. “The way we think about it is that this shock has taken place against the background of weak global growth and a multitude of shocks. And that’s worrying.
“Look at what’s happened in the US bond markets. The global economy is transitioning to a new regime. Prior to 2020, we had lower interest rates and [even] negative rates, higher growth, lower debt stock and lower interest payments.
“Now, you have the opposite. It’s a toxic combination of weak growth, high debt, high interest rates, and that can be a reason we might see an accident along the road.”