LONDON—Although the clash between Israel and Hamas has made for many headlines, lots of political debate and scores of demonstrations, its reverberations to the global economy thus far have been muted, notes a report by a pair of Bloomberg entities. However, the report warns, the Middle East military dispute has the potential to send world crude prices soaring to unprecedented highs if things take a turn for the worse.

“Thus far, the Israel-Hamas conflict has had limited impact on the global economy. However, an escalation to a direct war between Israel and Iran could result in oil prices rising to $150 a barrel and global output cut by $1 trillion,” cautions the new analysis by Bloomberg Intelligence (BI) and Bloomberg Economics (BE).

The study, “Middle East Energy Scenarios,” looks at four broad possibilities—a sustained ceasefire, a confined conflict, a multifront proxy war, and a larger war involving direct conflict between Israel and Iran—and their potential impact on global output and inflation.

Consequences For Crude

Should its status quo endure, the clash seems highly unlikely to launch oil prices into the stratosphere, the study acknowledges, but straight-line projections do not always pan out. Since history is littered with outcomes that have zigged when most prognosticators expected them to zag, the more remote and dramatic scenarios bear consideration.

“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,” reflects Ziad Daoud, chief emerging markets economist at BE and co-author of the report. “A risk scenario involving a prolonged conflict could result in a global recession that takes about $1 trillion off global gross domestic product, with surging oil prices and plummeting sentiment dropping growth to 1.7%. Outside of the financial crisis and pandemic, that would be the worst growth for world economy since 1982, when the Federal Reserve hiked interest rates to contain inflation from the 1970s oil shock.”

With consumers already recoiling from years of inflation, such an economic turn of events could prompt a wave of political backlash, he adds.

“The world economy is still recovering from an inflationary cycle exacerbated by Russia’s invasion of Ukraine in 2022, and another conflict in a critical energy-producing region could significantly recharge inflation to nearly 7% this year,” Daoud calculates. “The Federal Reserve’s 2% target would then be far out of reach, and costlier gasoline would be a hurdle for President Joe Biden’s re-election campaign.”

Significant disruption of production in the Persian Gulf region, which produces almost 20% of the world’s oil, or to oil transportation in the extreme case of a blockage of the Strait of Hormuz, may shift OPEC-plus policy to maximum output, the report predicts. It cautions that the spare production capacity in Saudi Arabia, the United Arab Emirates and Kuwait becomes irrelevant if the strait closes.

Some of the other countries likely to rush and fill that gap are undergoing their own wars, relates BI Senior Oil Analyst Salih Yilmaz, who also co-authored the report. Meanwhile, the United States probably will reverse plans to replenish its depleted Strategic Petroleum Reserve.

“OPEC-plus 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,” he reasons. “The United States would likely have to tap its SPR to make up for some of the lost barrels and limit the impact on prices at the pump.”

The pump isn’t the only place at which prices are likely to climb, he adds. “A direct war in the Middle East could push prices for liquified natural gas up by at least 35% if a Gulf-region conflict disrupts flows from Qatar, which sends more than 10 billion cubic feet of LNG through the Strait of Hormuz every day,” Yilmaz details.

Other Possibilities

According to Bloomberg, the report evaluates three other scenarios:

• A proxy war that may shorten the path to $100 oil;
• A confined war that curbs the economic hit; or
• A ceasefire that may prompt a limited oil price drop.

In the proxy war scenario, the report foresees a noticeable, but hardly dramatic, crude price climb, alongside a mild economic toll. “A proxy war, where Iran and Israel clash through proxies such as Lebanon and Syria, while less destructive than a direct war, may cost the global economy up to $300 billion, as prices jump up around $10 a barrel and investor confidence subsides,” Bloomberg describes. “This could cause a 0.3% percentage-point drag on global growth in 2024, which would be the weakest growth in three decades (omitting 2008 and 2020).”

Meanwhile, even if the conflict’s scope remains narrow, the report suggests oil prices still may rise. “A confined war scenario, characterized by limited Israeli airstrikes on Gaza and Hamas rocket attacks, could have muted impact on the global economy,” Bloomberg explains. “Oil prices shrugged off Iran’s April 13 strikes on Israel, suggesting that markets see the extension on of a confined war as the most likely scenario. BI and BE see risks for oil skewed to the upside as healthy demand and OPEC-plus’s tight grip on supply form a solid fundamental backdrop.”

Finally, the report predicts, a potential ceasefire seems unlikely to send oil prices tumbling because the geopolitical risk premium appears negligible. “In a recent BI survey, 92% of 143 respondents said that there’s a less-than-$5-a-barrel geopolitical risk premium attached to prices by the market,” Bloomberg reports. “Red Sea attacks have had a limited effect on prices so far and OPEC has a meaningful amount of spare capacity. . . . Moreover, OPEC-plus output policy likely won’t change in a ceasefire scenario if the impact on prices remains constrained.”

While bearing in mind the conflict’s extensive human toll, Yilmaz counsels against allowing the conflict’s heretofore mild economic consequences to obscure its significant hazards. “The Israel-Hamas war has thus far—beyond the very high human cost—resulted in limited global economic impact, but remains a geopolitical powder-keg, with sharper escalation still a real risk,” he assesses. “The secondary effects of a worsening conflict, with direct military engagement between Israel and Iran, would be utterly devasting for people in the region, with the human and social cost difficult to overstate.”

Therefore, he reasons, even if the most probable course of events points to relatively modest economic effects, the magnitude of the less likely possibilities makes it prudent to think about them. “A direct war would also be catastrophic for global markets,” Yilmaz concludes. “And while we see the continuation of a confined war as the most likely scenario, the fragile stability could easily shatter, with even a minor escalation potentially triggering a wider conflict. The recent Iranian attack on Israel serves as a stark reminder of the ever-present risk of escalation.”

Bloomberg notes that the report was prepared in advance of the Qatar Economic Forum, held May 14-16 in Doha, Qatar.