The current crisis in the Middle East has had a direct impact on the price of oil and uncertainty over whether the conflict will escalate further is providing the “perfect recipe for price instability” according to one investment analyst.
The magnitude of the effect of any war depends on the parties involved, the geographic location where the war is taking place and the resources the region is rich in. And with the Middle East sourcing a third of the world’s oil, it is no wonder that the price in crude oil experienced hikes peaking at USD78.62 a barrel after Israel launched an attack near the Lebanese capital of Beirut.
According to Andrew-Neal Farrugia, an economist and accountant who works as an investment analyst with GlobalCapital, the wider economic ramifications of the conflict in the Middle East have not yet been felt.
“Since the crisis is geographically insulated the main economies to be affected by this war would be the economies directly related to this crisis, namely Israel, Lebanon, Iran and Syria. Hence the magnitude of these effects is stronger on the stock markets of the respective countries,” Farrugia says.
“On the other hand it was business as usual in other equity markets, whose countries were not participating directly in the crisis.”
The situation may change if other Western countries become directly involved in the conflict.
War and conflicts in general lead to indecision and economic unrest. However the magnitude of the effect depends on, amongst other things; the parties involved in the war; the geographic location where the war is taking place, the resources the region is rich in.
With respect to the current crisis the largest affect to be felt is related to the prices of energy resources, namely oil. This is due to the fact that the Middle East region is rich in oil. The Middle East, in fact, sources a third of the World’s oil. Oil prices have already risen by about 25 percent this year, pa rtly on concern supplies from Iran would be disrupted by a dispute over its nuclear research. Iran is the world’s fourth-largest crude oil producer; it is also one of the sponsors of Hezbollah, along with Syria. Hezbollah is the militant group Israel is fighting against.
Prices in Crude oil experienced hikes peaking at $78.62 a barrel after Israel launched an attack near the Lebanese capital of Beirut, raising concerns that the conflict would spread within the Middle East.
The worries that the conflicts could spread are coming from the fact that Israel is blaming the current crisis on Iran and Syria. Iran in turn has warned Israel that any attack on Syria will lead to retaliation by Iran. Israel however stated that it is not seeking a wider war.
This web of politics gives rise to uncertainties on whether the situation is expected to escalate or otherwise. This proves to be a perfect recipe for price instability. With unexpected developments in the way the war will progress affecting the markets accordingly.
Since the crisis is geographically insulated the main economies to be affected by this war would be the economies directly related to this crisis, namely Israel, Lebanon, Iran and Syria. Hence the magnitude of these effects is stronger on the stock markets of the respective countries.
For example, the major effect on the equities markets has come from Israel’s stock exchange were the market rallied gaining 2% on news that the hostilities could end a week earlier. Normally, unexpected good news, such as is an earlier than expected end to the conflicts, will lead to stock markets to pick up with more impetus.
On the other hand it was business as usual in other equity markets, whose countries were not participating directly in the crisis. At time of going to press (3.40pm, Tuesday) the Nasdaq Composite index gained +0.69%, the FTSE 100 gained +0.11% and the Turkey market the closest, geographically, to the region where the saga is unfolding has witnessed the largest gains with the Istanbul stock exchange Ulusal 100 Index gaining +2.8%. Which goes to show that for the time being, apart from oil, the region is quite insulated from the rest of the economies. On the other hand US, UN or European Union participation will tend to result in a broadening of the economic effect.
Farrugia is an economist and accountant by profession and works as an investment analyst with GlobalCapital