What the Israel-Hamas conflict could mean for inflation, oil prices

With Israeli airstrikes marking the fifth day of escalating conflict between Israel and Hamas on Wednesday, experts are warning of rising oil prices and inflationary pressure as a potential consequence of the ongoing hostilities.

On Tuesday, the International Monetary Fund’s chief economist, Pierre-Olivier Gourinchas, said it’s “too early” to assess the impact on global economic growth from the days-old conflict.

But he said the IMF was “monitoring the situation closely” and noted the rise in oil prices when the conflict first began.

“We’ve seen that in previous crises and previous conflicts. And of course, this reflects the potential risk that there could be disruption either in production or transport of oil in the region,” he said.

Meanwhile, World Bank President Ajay Banga said Tuesday that the Israel-Hamas conflict is an unnecessary global economic shock that will make it harder for central banks to achieve soft landings — a slowdown that avoids a recession — in many economies if it spreads.

“It’s a humanitarian tragedy and it’s an economic shock we don’t need,” Banga told Reuters on the sidelines of the World Bank International Monetary Fund annual meetings in Morocco.

Central banks were “beginning to feel a little more confident that there was an opportunity for a soft landing, and this kind of just makes it harder,” Banga said.

Rory Johnston, the founder of online oil research firm Commodity Context, noted the impact of the conflict on oil prices was immediate.

“This (conflict) is bullish for oil prices,” he told Global News Wednesday. “The immediate short-term reaction, as we saw, was about a $3 or $4 increase in the price of global crude oil coming out of the weekend.”

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Though the area doesn’t produce much oil, the worry was that the violence could spill into the politics around the crude market and hurt the flow of petroleum.

After initial shocks due to the conflict, however, oil prices have pulled back in recent days, helping to take some heat off inflation and support Wall Street.

A barrel of U.S. crude oil dropped two per cent to US$84.27. Brent crude, the international standard, fell 1.4 per cent to US$86.42 per barrel in early afternoon trading Wednesday.

Prices settled slightly lower on Tuesday after Saudi Arabia said it was working with regional and international partners to prevent an escalation, and reaffirmed its efforts to stabilize oil markets.

Johnston said that while the short-term, knee-jerk reaction of the markets to the crisis was to be expected, the medium-term trends depend on how some of the other players in this conflict react.

In particular, he said observers should look at to what degree Iran, which he said has recently ramped up its oil exports, gets involved in the conflict.

“One of the major trends that we’ve observed so far this year has been a dramatic increase, about 500,000 to 700,000 barrels a day, in Iranian production and export of crude oil. And this is notable because there has not been an official change in the stance of Washington sanctions against Iran,” he said.

If Iran plays a larger role in the ongoing conflict, Johnston said that Tehran stands the risk of the United States tightening sanctions, which could affect global oil supply.

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Johnston said the conflict could also jeopardize a potential deal between Saudi Arabia and Israel to normalize relations between the two states. 

If the Israeli bombardment of Gaza continues at the same pace, Johnston said Saudi Arabia could see itself as part of a coalition of Arab states that exerts some kind of pressure on Israel to end its assault on Gaza.

“The more the politics deteriorate there, the harder it’s going to be for Saudi Arabia to kind of continue supporting this deal,” he said.

Experts have also warned that the uncertainty around oil prices could lead to inflationary pressures and rising food prices, which have already been under stress due to the war in Ukraine and Russia’s withdrawal from the Black Sea grain agreement.

“Last year, those pre-existing inflationary concerns and supply chain bottlenecks were supercharged by Russia’s invasion of Ukraine and subsequent energy shock and food shock. I think that this feeds into that exact same concern,” Johnston said.

“We are already in a challenging political moment, both in terms of growth and inflationary pressures, and now the geopolitical crises continue to spiral.”

— with files from Reuters and Associated Press

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