At the Altar of Disarray
The economics of the (renewed) Middle-East conflict (Free)
Issues contributed:
The winner of a major conflict in the Middle-East would be Russia.
Even a relatively minor disruption in gas supplies through the strait of Hormuz could ‘freeze’ Europe and push poorer nations deeper into crippling energy shortages.
The conflict has the potential to push the world economy into a complete disarray.
Past week I published an economic worst-case scenario for the threatening Israel-Palestine war. In this entry, I will continue to map the both the economic and geopolitical aspects of the conflict.
Opening a can of worms
It’s almost like a twist of fate that a region, which is so diverse in culture and religion a ‘burning point’, also holds so vast amounts of primary energy the world depends on. Currently, Middle-East (from now on ME) produces around 30% of global daily supply of oil.1
The biggest buyers of ME oil are: China, India, Japan, South Korea, Egypt and the U.S. from which China is clearly the largest. China thus has a major stake in the Isreali-Palestine conflict, but so does Russia. If conflict in the ME escalates, Russia is very likely to see the demand of her oil to soar, regardless of the sanctions.
Qatar has become a dominant exporter of liquefied natural gas (LNG) with her exports accounting for close to 26% of global supply, with 136 billion cubic meters or around 62 million metric tons of LNG exported in 2022. Needles to say that her exports run through the strait of Hormuz.
And now we get to the ‘pickle’.
According to BloombergNEF, Europe needs around 42 million metric tons of LNG during the winter of 2023-2024 (assuming normal winter conditions), while the available flexible LNG supply is (was) 58 million metric tons. So, the gap between European needs and global availability is just 16 million tonnes. This means that even a relatively minor distruption in LNG shipments throught the strait of Hormuz would push global LNG markets into a disarray. There would be a massive struggle for LNG with Europe scraping all it can with whatever price. The LNG hunger of Europe has already led to a massive spike in LNG price and pushed poorer countries into de-industrialization and blackouts. If Iran would close the strait altogether, Europe would effectively plunge into darkness (or coldness, that is).
In all scenarios, where supplies through the strait of Hormuz would become compromised, demand for Russian gas and oil would be likely to explode. The same applies to possible embargoes (see below). The ME conflict could thus turn into a major victory for President Putin. This is, because it can (already has) turn the public eye and support away from Ukraine, and because if the conflict escalates, Russia would, most likely, see a notable increase in demand of her energy products.
To summarize, a major conflict in the Middle-East, in winter-time, would be like opening a can of worms. The only western benefactors would be U.S. LNG and European gas industries, which would see both demand and (publicly supported) investments soaring. This would be a cold comfort for freezing Europeans and escalated suffering of poorer nations across the globe.
Next some views on the situation in the ground.
A non-winnable war?
I came across with interesting theory of why Egypt is keeping its Raga border crossing closed. It relates to Nakba, that is, a forced re-allocation of 75 000 Palestinians by pre-state Israelians on 15 May 1948. A hypothesis has been floated that Israel would be trying to clear out most of Palestinian lands to establish a full Israelian state by annexing the Gaza strip. There’s also a gas field, Gaza Marine, near the Gaza strip, which development Israel quietly approved in June this year.
So, a somewhat conspiratorial view to the Gaza-conflict would be that it would be a takeover of the Gaza strip to complete the Israeli state and to gain control of the gas fields. Naturally, it’s impossible to say, which is the role such factors play in the conflict, but it’s unlikely to be negligible.
The stated objectives (crushing Hamas) would most likely require a temporary occupation of Gaza. So, somewhat unsurprisingly, there are rumors of a serious internal conflict within Knesset (parliament) and Israeli leadership concerning the ground assault. There are said to be fears of both its cost and chances of success.
Fifty years ago, the Yom Kippur War erupted after Egyptian soldiers surged across the Suez canal, while Syrian troops advanced to the Golan Heights in a surprise attack, quickly repelled by Isreali forces. This time around, Israel would be moving into an area which, most likely, has been prepared for a guerilla warfare for some time. It may turn into a trap for the Israeli Defence Force (IDF).
Rumors from Israelian intelligence state that they are worried Hezbollah opening a northern front if IDF enters Gaza. In the worst-case, the ground-assault could draw Israel into a three-front war with Syria, Lebanon (Iran) and Jordan (and possibly even Egypt). In 1973, Israel held a military upperhand in the region with the direct assistance of the U.S. Now, scales are much more balanced, militarily.
Currently, the U.S. is also unable to offer the support it did in 1973, because there’s still no speaker of the House, while a government shutdown looms. There are also rumors that the U.S. is holding back of the support, because it’s afraid of the likely serious economic ramifications of a region-wide confclit, and because the U.S. is ill-equipped to fight another regional war in addition to Ukraine. Another unsuccesful war could make it look weak further encouraging her enemies across the world.
I admit that this is my worry also. Current U.S. administration has made a cataclysmic mistake in Ukraine, which has both boldened and strengthened Russia, while making NATO look weak and unprepared (to an informed observer). Pax Americana, while destructive to some (e.g., Colombia, Iraq and Afghanistan), has kept the ambitions of many authoritarian leaders in check. If the weakness of the U.S. is revealed in Middle-East, like it has now in Ukraine, we could end up seeing a lot of ‘hot spots’ emerging across the world.
To summarize, victory of Israel, if it enters to Gaza, would be very far from guaranteed. The “hearts and minds” battle has also been turning against Israel, recently.
Endgame nears
In Tuesday evening the conflict saw its most gruesome atrocity thus far, when (allegedly) IDF leveled a Al-Ahli Baptist Hospital in the Gaza strip. Hospital was reportedly sheltering thousands of displaced people in addition to patients and staff, when it was hit.2
The hit has pushed the conflict into the next, a more unpredictable and dangerous phase. Heavy civilian casualties of IDF bombings of Gaza have turned the international sympathy towards Palestinians, while enraging and unifying the Arabs across the world.
The hospital strike led to cancellation of the Amman Summit, where President Biden would have met with King Abdullah, the Egyptian president Abdel Fatah al-Sisi and Palestinian Authority president Mahmoud Abbas. The cancellation was made by Jordan. It should also be noted that Iranian and Saudi-Arabian ministers have been meeting regularly during the past week, which is something that has not happened for a quite some time. This means that any ground-offensive of IDF to Gaza would, most likely, be met with strong show of force from surrounding Arab nations.
In an ominous echo from history, Iranian Foreign Minister has called for full oil embargo to all countries that support Israel. It was such an embargo, which led to the oil crises in the 1970s, and which was the second point in my worst-case scenario right after the war taking a regional-turn.
It thus seems that only two options remain for Israel: Either to enter into a possible (likely) three-front war with a highly uncertain outcome, or simply to stand down and accept current realities (and losses received and inflicted).
It’s rather difficult to forecast, which path the war cabinet of PM Benjamin Netanjahu will take. Can they walk back from their harsh statements of revenge and wiping Hamas “off the face of the earth”? If they do, this would also imply something of a political suicide for PM Netanjahu as he faces serious corruption charges. It would not be the first time, when personal issues of politicians trump the greater good.
In any case, we have entered the most dangerous situation the world has seen for a quite some time. If the ground-offensive of Israel begins, it’s likely that we see the 10 points of my worst-case scenario begin to materialize. If that comes to be, we can only hope it stops at the first few. However, even the manifestation of the first few points may be enough to push the world into an economic abyss.
Whether you are religious or not, praying may not be a bad idea.
Disclaimer:
The information contained herein is current as at the date of this entry. The information presented here is considered reliable, but its accuracy is not guaranteed. Changes may occur in the circumstances after the date of this entry and the information contained in this post may not hold true in the future.
No information contained in this entry should be construed as investment advice. Readers should always consult their own personal financial or investment advisor before making any investment decision, and readers using this post do so solely at their own risk.
Readers must make an independent assessment of the risks involved and of the legal, tax, business, financial or other consequences of their actions. GnS Economics nor Tuomas Malinen cannot be held i) responsible for any decision taken, act or omission; or ii) liable for damages caused by such measures.
In the worst-case scenario I cited a study claiming that one-third of all natural gas and one-sixth of oil would be travelling through the strait of Hormuz. It seems that these statistics vary a bit depending the source. In any case, the role of ME in global energy balance is massive.
To note, the U.S. intelligence has concluded that IDF was not to blame, but the ‘fog of war’ is too thick to see through at the moment, and citizens of most surrounding nations seem to blame Israel.