'If Iran...': How escalation of Israel-Hamas war can impact oil price, global economy

As Israel continues to bombard Gaza, the possibility of the war escalating and spreading into the wider region is real. US Secretary of State Anthony Blinken has, in the last few weeks, made frantic visits and calls to first Israel and then the Gulf countries to contain the conflict and prevent it from spreading to the Middle East - a major oil-producing and exporting region. 

Iran, which backs Hamas in Gaza and Hezbollah militants in Lebanon, has warned Israel of 'grave consequences' if it does not stop military operations - a demand that Israeli PM Benjamin Netanyahu has flatly rejected. 

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However, if war spreads, the global economy, which is already facing a slowdown, may face serious risks. The World Bank recently warned that if the conflict widens, the prices of oil may shoot by 56 per cent to 75 per cent initially to between $140 and $157 a barrel.    

Economic affairs commentator Martin Wolf said if war remained restricted between Israel and Hamas, the impact would be immeasurably small and would be very insignificant. He, however, said that there will be a sense of uncertainty about a possible escalation in various directions. "Uncertainty is bad for the world economy - it affects people's willingness to take risks," he said while speaking to India Today's News Director Rahul Kanwal. Wolf said that wars have some impact on sentiment, but "I would not expect the effect to be very dramatic".

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If war escalates and involves Hezbollah

In this scenario, Wolf said that the direct effect of escalation of war would be pretty small but uncertainty would increase because of the fear of further escalation into the Gulf. He cited the example of the Syrian war where he said humanitarian cost was massive in terms of refugees but economic effects were really very small.

If Iran along with proxies enters war with Israel

When asked about wider conflict if Iran decides to enter the fray, Wolf, chief economics commentator at the Financial Times, said the impact on the world economy would depend on how badly the oil production and exports from this region are affected. The Gulf produces about a third of world oil and contains half of the world's reserves. He said that if Iran decides to block the Strait of Hormuz and stop tankers from moving there then that will have a dramatic effect on the world economy because, as the charts have shown, the prices of crude will shoot up to high levels. 

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"It will be significantly more damaging than most of the oil shocks we have seen before. It could be like the first and second oil shocks of the 70s and they were clearly very...very dramatic events," Wolf said, adding that if the war spreads and involves Russia and China, it could become a major global economic event.  

On the possible impact on the Indian economy, noted economist Neelkanth Mishra said the country's GDP and energy are deeply intertwined as it imports 48 per cent of its dense energy needs. So if energy prices globally start going up then it will be very impacted, he said. "India imports about 1.6 billion barrels every year. So every dollar (increase) per barrel is about 1.6 billion dollars." Mishra said if the oil prices go up by $25 then India will have to shell out  38 billion dollars more on oil import and that's about 1 per cent of GDP.

When asked whether the war could affect investment in India, Mishra answered in negative. He said the major reason why India's economy is doing so well is that unlike in the rest of the world where the real estate market is turning down the country has seen a 10-year downturn in real estate and it's just about starting to turn up. "So we are starting to see double-digit volume growth in cement demand, we are starting to see power demand going up, tiles and PVC pipes everything ...these trends do not fade very quickly."

He said the country faced a power shortage when the heat wave peaked and that happened due to 10 years of chronic underinvestment in power generation capacity because of the excesses that happened a decade back. "Higher prices of oil will actually accelerate the transition towards green energy and green hydrogen. So you actually could trigger new investment." 

Martin Wolf said India is relatively in a good position to withstand the shock. He said India's real estate cycle indeed has turned around, and the financial sector seemed in pretty good shape. "There seems to be a fair amount of animal spirits, it's a large country with a large domestic market. Trade is more important than it used to be but not that important. So barring some really big global catastrophe, India is in a pretty good position to survive (this crisis)," he said.