The Oct. 7 attack on Israel by Hamas and the resulting months-long conflict has sparked tragic loss of life, regional chaos, and global knock-on effects. In addition to the significant humanitarian toll of the ongoing conflict and the cost to countries directly engaged in hostilities (in November, Moody’s estimated that the war was costing Israel $269 million per day), the conflict has already had regional economic ripples and risks rising to an international level. Over the weekend, U.S. Secretary of State Antony Blinken traveled to the Arab Gulf to press Qatar, the UAE and Saudi Arabia to do more to support an end to the war, warning that the conflict “could easily metastasize.” Global oil supply, shipping routes, the regional tourism industry, and even individual businesses with real or perceived ties to the conflict are seeing negative impacts from the ongoing war and could see more as violence spreads.
Global Economic Challenges
Oil prices are among the most anticipated casualties of any war in the Middle East. After a brief spike reacting to market panic in the immediate aftermath of the attacks, however, oil prices have remained remarkably steady. The relative consistency of energy prices is due to the fact that production has not been affected, and disruptions to shipping routes have not decimated oil and gas shipping, only about 10% of which globally moves through the Suez Canal and the Red Sea. However, conditions could change rapidly given the tight oil market. In response to unrelated security challenges, Libya’s National Oil Corporation declared force majeure on Sunday on the country’s largest oil field (capacity of 300,000 b/d.) due to protests that risk spreading to a nearby oil field and impacting supplies to refineries in the Mediterranean and Northwest Europe. Increased Hamas or Iranian proxy attacks on Israeli gas infrastructure (Chevron took Israel’s natural gas Tamar field offline for about a month following the attacks), spread of the conflict to Iranian production centers, or further Red Sea harassment more severely limiting oil and gas shipments could easily reduce supply to the global market, sending oil prices spiking. In November, the World Bank warned that a broader war between Israel, Hamas and Iran-backed proxies throughout the region could cause oil prices to rise as much as 75%. Such a jump would be significantly damaging to world economies that are only just beginning to emerge from post-COVID-19 spells of slow growth and inflation – the IMF estimates that as little as a 10% increase in oil prices could weigh down global growth by .15 of a percentage point. High oil prices could send recovering economies into another tailspin.
Stock market reactions have similarly been mostly muted and temporary, but could accelerate, to disastrous effect, given further escalation and spillover of the conflict. Government bonds have climbed for some economies, but the broader impact has so far been minimal. Net portfolio flows to the region (a sign of investment sentiment) were already on a downward trend prior to the onset of the conflict, accelerated immediately post-Oct. 7, but have for the most part returned to pre-conflict levels. Rising risk perceptions, however, could start the slide again, pushing up borrowing costs.
Among the most direct impact of the broadening Middle Eastern conflict on the international economy is a maritime campaign against international shipping in the Red Sea undertaken by the Houthis, an Iran-backed rebel group that controls large swaths of Yemen. The Houthis have long used small-scale maritime aggression as a tactic to impose costs on their U.S. and Gulf Arab foes and turned the strategy on global trade more broadly in late 2023, joining other Iran-backed militias to push back violently against Israel and its supporters. Since beginning its attacks on freight ships in the Red Sea, the insurgent group has targeted upwards of 20 ships of various nationalities, typically using small watercraft, drones and other weapons supplied by or manufactured in Iran.
Since the onset of these attacks, around 18 shipping companies (among them Maersk, MSC, Hapag-Lloyd, and, as of this week, China’s COSCO) have decided to reroute vessels around the Cape of Good Hope in South Africa rather than risk the Red Sea and the Suez Canal. The Suez Canal is used by roughly one third of global container ship cargo, and redirecting ships around the Cape of Good Hope at the southern tip of Africa is expected to cost up to $1 million in extra fuel for every round trip between Asia and northern Europe. Spot rates for shipping goods from Asia to Northern Europe are up 173% compared to before shippers started rerouting shipments, and rates to North America's East Coast are up 52%, according to Freightos, a booking and payments platform for international freight. On the bright side for shipping companies, however, expectations of higher freight rates have bumped their shares, with Maersk up 6% immediately after announcing a continuation of their Red Sea policy, and Hapag-Lloyd shares up 5%. Unlisted French shipping group CMA CGM announced on January 1 that it would be increasing its container rates from Asia to the Mediterranean by up to 100% as of January 15. While a potential boon to shipping companies, higher freight rates will pinch manufacturers, logistics companies, and finally consumers who are ultimately buying shipped goods.
Safety concerns present a significant risk to the region’s tourism industry, virtually halting travel to Israel and its neighbors, and even damaging regional countries further afield. Tourism is a core industry for many Middle Eastern countries, like Egypt and Jordan, and others, such as the UAE and Saudi Arabia, have heavily invested in plans to become regional tourism hubs. International travel operators have cut or scaled back excursions, cruise lines and airlines have redrawn transit planes and scaled back service, and many travelers are making the independent decision to avoid the region for their own personal safety. ForwardKeys, a data analysis firm that tracks global air travel reservations, saw bookings to the Middle East drop by 26% in the three weeks after Hamas’ Oct. 7 attacks, with inbound bookings to Israel dropping by more than negative 100% (as cancellations exceeded new bookings). In December, Norwegian became the first major cruise line to cancel all 2024 sailings to Israel; since then Royal Caribbean has removed Israel from all 2024 itineraries and rerouted two of its ships in the Middle East to the Mediterranean, and MSC Cruises canceled port calls in Jordan and Egypt on most of its itineraries, as well as Israel. While much of the impact has been limited to Israel and its immediate neighbors, a broader conflagration could threaten other countries as well. Immediately after the Oct. 7 attacks, hoteliers in Dubai told Financial Times that they had seen cancellations from Israeli and American tour groups, but that broader tourism had not flagged. As confrontations have spread throughout the region, however, concerns about safety could become more broad, impacting feelings of personal safety in Arab Gulf countries more broadly, a problematic prospect for the UAE and Saudi Arabia, both of which have invested significant funds to prioritize their once-dormant tourism industries in the drive to diversify their oil-driven economies.
At a smaller scale, rising pro-Palestinian sentiment throughout the world has contributed to scattered protests and boycotts of businesses believed to have pro-Israel stances. Driven by social media sentiment – primarily on TikTok and Instagram, where younger users congregate – users have mostly focused on McDonalds (after a franchise owner in Israel said that his restaurants would be providing free meals to the Israeli Defense Forces) and Starbucks (after the business sued a union for making a post on its X account in “solidarity with Palestine”). Any impact on either business is difficult to ascertain (both reported rising sales in their most recent earning reports), but videos using hashtags calling for boycotts of McDonalds and Starbucks have been watched 50 and 10 million times, respectively. Last week, McDonalds’ CEO said that some markets in the Middle East and nearby were experiencing a “meaningful impact” due to “misinformation about the brand,” and in late December, McDonalds’ Malaysia business sued Malaysia’s Boycott, Divestment and Sanctions (BDS) movement for over $1 million in damages for linking McDonalds to the conflict in the Middle East.
Risks of Escalation
Economic impact as a result of the conflict in Israel and Palestine has thus far mostly been limited, with financial channels largely returning to baseline levels and other impacts remaining limited to the conflict’s immediate neighborhood. However, escalation of the war into a broader regional conflict could accelerate these effects, wreaking havoc on the region’s economy and on global markets. Changes to the global oil supply would have global knock-on effects – particularly disconcerting as the fragile world economy begins to see the light at the end of the tunnel of post-COVID-19 recovery – and further risks in the Red Sea, already causing shipping disruptions, could have significant negative impacts on global supply chains.
As hostilities have continued to spread beyond the Gaza Strip, regional escalation seems to be more certain every day. Tensions in the Red Sea could further escalate if the tempo of attacks increases (with the support of Iran, which provides most of the Houthi’s funding and weapons) or targeting shifts to U.S. Navy vessels or those of its allies. Tensions could also spread further in Lebanon, where Israel and Hezbollah have traded cross-border attacks since the onset of the conflict. Hezbollah’s response to a recent airstrike on Beirut that killed a Hamas leader (widely presumed to be the work of Israel) signals that the group may not want to engage in a full-scale war (for reasons ranging from domestic turmoil, the high cost of the war, and a lack of support from the Gulf, which they had during their last conflict with Israel in 2006), but opportunities for escalation remain. Sunday’s killing of a senior Hezbollah leader on the Israel-Lebanon border represents the highest-profile death in several years, a blow that insiders have told media is “painful” and that could heat up that theater significantly. Finally, in Iraq and Syria, where the U.S. has long been fighting a low-intensity battle against Iran-backed militias, both sides have increased the scale and tempo of attacks; last week, the U.S. undertook the most significant airstrike in that area since Oct. 7 when it killed a militia leader in Iraq’s capital. The Iraqi government has responded by announcing internal discussions on ending the U.S. military presence in the country. If the U.S. military is forced out of Iraq, its counterterrorism operations in Syria will be difficult to sustain due to logistical issues, opening the possibility of an ISIS resurgence in the Arab heartland. Across these theaters, much will rely on Iran’s sentiment and willingness or ability to financially support expanded efforts by its proxies to impose costs on Israel and its allies. While regional chaos would also harm Iran – oil exports are its most reliable form of income – it derives significant symbolic strength as a bulwark against Israel and the U.S. Even if the intensity or scope of the current conflict does not increase, an extended period of disruption and uncertainty will have similar negative impacts – and hostilities do not appear likely to halt in the near term.