As tensions escalate in the ongoing Israel-Hamas conflict, a recent analysis by Bloomberg Intelligence (BI) and Bloomberg Economics (BE) sheds light on the potential economic fallout should the situation escalate into a direct war between Israel and Iran. The report, titled "Middle East Energy Scenarios," explores four distinct scenarios, each carrying significant implications for global GDP, inflation, and energy markets.
The analysis underscores that while the current conflict has thus far had limited impact on the global economy, a shift towards a full-scale war between Israel and Iran could lead to severe disruptions, particularly in energy markets. Ziad Daoud, Chief Emerging Markets Economist at Bloomberg Economics and co-author of the report, emphasized the gravity of the situation, stating, "Our base case is that the war will remain largely confined, as it has been since October, with limited impact on the global economy. But this could change."
In the event of a prolonged conflict, the report suggests a potential global recession that could wipe off approximately $1 trillion from global GDP. This dire scenario would be accompanied by surging oil prices, potentially reaching $150 per barrel, and a sharp decline in overall sentiment, dragging global growth down to a meager 1.7%.
Salih Yilmaz, Senior Oil Analyst at Bloomberg Intelligence, provided further insight into the potential repercussions on energy markets. Yilmaz highlighted the vulnerability of oil production in the Persian Gulf region, which accounts for nearly 20% of the world's oil supply. He warned that any disruption in production, or even the extreme case of a blockage of the vital Strait of Hormuz, could prompt a significant shift in OPEC+ policy towards maximum output.
"The spare production capacity in Saudi Arabia, the United Arab Emirates, and Kuwait would become 'irrelevant' if the strait is shuttered," remarked Yilmaz. "OPEC+ members with spare capacity, like Russia and Kazakhstan, would benefit as they would have room to maximize production at higher prices to compensate for reduced output from the Gulf countries in the cartel."
Moreover, the report highlights the potential impact on liquefied natural gas (LNG) prices, particularly if a conflict disrupts flows from Qatar, a major LNG exporter. A direct war in the Middle East could lead to a significant spike in LNG prices, potentially by at least 35%, as flows through the Strait of Hormuz are disrupted.
The analysis also delves into other conflict scenarios outlined in the report:
1. Proxy War Scenario:
In this scenario, conflict between Iran and Israel is mediated through proxies such as Lebanon and Syria. While less destructive than a direct war, it could still result in a significant economic toll, with oil prices potentially reaching $100 per barrel and causing up to $300 billion in economic losses globally.
2. Confined War Scenario:
Characterized by limited Israeli airstrikes on Gaza and Hamas rocket attacks, this scenario could have muted impact on the global economy. However, risks for oil prices are skewed to the upside, as healthy demand and OPEC+'s tight grip on supply could exacerbate any disruptions.
3. Cease-Fire Scenario:
While a potential cease-fire may lead to a limited drop in oil prices, the current geopolitical risk premium appears negligible. Despite recent Red Sea attacks having a limited effect on prices, OPEC's meaningful spare capacity suggests that any impact on prices would likely remain constrained.
In conclusion, the analysis paints a grim picture of the potential economic consequences of an escalation in the Israel-Hamas conflict, highlighting the fragility of the situation and the urgent need for diplomatic efforts to mitigate risks.
