Thoughts About the Middle East
I will focus on the investment implications of the war in Gaza rather than the murderous activities of Hamas. The energy markets have engaged in the typical kneejerk way by driving up prices, but we suspect the rise will be just temporary. Trade flows are not likely to be disrupted only briefly. The risk is that the conflict broadens out to include Iran, which would create more upward pressure on oil prices and inflation. But while that’s a risk, it is likely that most of the parties involved, including Iran, would want to avoid a major broadening of the conflict. So, the economic implications are likely to be limited.
Gaza trades little with the broader world. In fact, much of its trade is with Israel. But Israel is a sizable trading partner with many Western countries and that will be shut down, at least briefly. Notably, Israel is now a significant exporter of natural gas from its offshore fields to Egypt and on to Europe. Out of a sense of caution, the Israelis shut down at least one of those fields, at least temporarily. I’d expect them to reopen it fairly soon once they become confident that it won’t come under attack. Hezbollah in Lebanon, rather than Hamas in Gaza, would be the far greater threat to the gas field, but so far, Hezbollah has done little to open a second front in support of Hamas. Since they haven’t joined the fight alongside Hamas, it isn’t likely they will do so now.
Hamas doesn’t have the capacity to make any inroads into Israel, except temporarily. Its incursion is likely to be over within another day, possibly two. Their real objective, quite likely at Iran’s bidding, was to disrupt the peace talks between Israel and Saudi Arabia by killing as many Israelis as possible and blame Israel for its own casualties. In that sense, Hamas has already accomplished its objective and would likely prefer to have a truce as soon as possible, before they bear the brunt of Israel’s retaliation. I doubt Israel will accommodate that preference. I expect the fighting to shift over into Gaza very soon, as the Israelis try to win back the hostages and to take out the Hamas leadership. The Israelis will not settle for a quick truce without first inflicting some serious penalty on Hamas and Gaza. Rather, Israel will want to take out some or much of the Hamas leadership, if that’s possible. So, the battles seem likely to drag out somewhat.
Oil prices did spike in the aftermath of the conflict, as did gas prices, especially in Europe. But this is likely to be just temporary, since only Israel is an exporter of natural gas to Egypt and Europe and it is likely to turn those facilities fairly quickly. Gaza is an importer of energy, not an exporter. The Saudis may also boost production, but certainly U.S. producers will take the opportunity to boost sales. So, the reverberations of the conflict are likely to be mostly political, not economic.
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