The ongoing conflict between Israel and Hamas in the Gaza Strip has once again highlighted the intricate relationship between geopolitical tensions in the Middle East and global economic stability, particularly concerning oil prices. As rockets flew and airstrikes intensified, warning bells reverberated throughout financial markets, prompting analysts to assess the potential impact on one of the world’s most crucial commodities: oil.

This could not have come at a worst time as the global energy market is grappling with the aftermath of the Russian invasion of Ukraine, ongoing supply cuts by OPEC+ and also the Red Sea Shipping Crisis. Find out more about Why OPEC+ Is Cutting Oil Productions.

According to the Guardian, geopolitical unrest in the Middle East has been synonymous with volatility in oil markets historically. This correlation stems from the region’s significance as a major oil-producing area and its geopolitical sensitivity, often serving as a catalyst for fluctuations in oil prices. The rule of thumb in geopolitics suggests that recessions can be triggered by sharp jumps in oil prices, a sentiment underscored by the current conflict.

The 1973 Yom Kippur war provides a stark precedent. Israel’s counteroffensive prompted an oil embargo from the Organization of the Petroleum Exporting Countries (OPEC), leading to a fourfold increase in crude prices, skyrocketing consumer prices, and a phenomenon known as stagflation—characterized by soaring living costs and stagnant economic growth.

Today’s global economy, however, differs from that of the 1970s. While oil remains a vital commodity, its importance has diminished, thanks to increased efficiency in its usage. Nevertheless, oil prices are still sensitive to events in the Middle East, and the Israel-Palestine conflict has once again brought this reality to the forefront.

The potential scenarios emanating from the conflict offer insights into the possible trajectories of oil prices and their economic ramifications. In the best-case scenario, if the conflict remains contained to an Israeli ground assault on Gaza, oil prices could stabilize around their current levels. However, a broader regional conflict involving Hezbollah forces in Lebanon or Iranian intervention could escalate tensions further, leading to disruptions in energy supplies and a significant surge in oil prices.

Nicholas Farr of Capital Economics warns of the possibility of a broader regional conflict drawing in Iran and other Arab states, potentially propelling oil prices to $150 a barrel—a figure that could trigger double-digit inflation in the US and Europe and prompt central banks to intervene with interest rate cuts and quantitative easing.

The doomsday scenario, as envisioned by historian Niall Ferguson, introduces a nightmarish prospect: a third world war sparked by China’s opportunistic actions amid the Middle East crisis, leading to severed global supply chains, plummeting asset prices, and catastrophic economic consequences rivaling the Great Depression.

Ultimately, the extent to which the Israel-Palestine conflict influences oil prices and the global economy hinges on the escalation or containment of hostilities and the responses of key players, such as OPEC and major oil-producing nations like Saudi Arabia. As finance ministers and central bank governors worldwide brace for potential shocks, the interplay between geopolitics and oil markets underscores the delicate balance between peace and prosperity in an increasingly interconnected world.