Hamas militants’ surprise attack of Israel on October 7 killed more than 1,200 people and they took more than 200 hostages back to Gaza. Israel’s subsequent bombardment of Gaza in a bid to eliminate Hamas has increased the risk of a spillover to the wider Middle East region, various media outlets and politicians have admitted. 

For instance, during a speech on November 6, Singapore Deputy Prime Minister and Minister for Finance Lawrence Wong said that the country was keeping close tabs on the political and economic situation in the Middle East. 

With regard to the Israeli-Hamas war and its impact on Singapore, Wong stated: “For now, the direct economic impact is small, because of our limited trade and investment linkages with Israel.” 

Likewise, a spokesman for Singapore port operator PSA told The Straits Times that “Israeli ports handle about 0.4 per cent of the world’s container throughput, so disruptions to the global container trade flow are limited. Impact on Singapore’s container volumes is very minimal.”

However, should the conflict between Israel and Hamas broaden into a regional conflict in the Middle East, Wong added that “there will certainly be wider implications, especially on oil and food prices.”  

Consequently, Wong added: “We are updating our drawer plans should the situation take a turn for the worse and we are impacted. Container shipping ports in Singapore have so far not been impacted by the conflict between Israel and Hamas, despite reports of congestion and a backlog of cargo at the Israeli ports of Haifa and Ashdod, as well as the closure of smaller ports around the coastal Gaza enclave.” 

Also, the Maritime and Port Authority of Singapore (MPA) is monitoring the security situation in the Middle East, a spokesman said.

The two bottlenecks in the region are the Suez Canal in Egypt, a key maritime trade route linking Europe and the Middle East to Asia, and the Strait of Hormuz between Oman and Iran, the only waterway permitting oil to be carried from the Gulf region to the Indian Ocean and beyond.

As of the time of writing, MPA has not obtained notifications of disruptions to shipping in that area by Singapore-flagged ships, the spokesman said. 

In 2021, when the Suez Canal was obstructed by a large container ship that ran ashore, the cost to ship a 40-foot container from China to Europe supposedly almost quadrupled to US$8,000 (S$10,970) from rates a year before. 

Therefore, a widening of the Israeli-Hamas war to include neighboring countries could lead to increased oil prices, concerns about oil supply, and the potential for a global economic downturn.

In an update to customers on October 12, shipping line MSC said congestion was rising at Israel’s Ashdod port owing to increased security checks and labor scarcity. Also, Ashdod has enforced restrictions on the transport of hazardous materials, leading to longer transit times.

Based on an update on October 31 by North Standard, the Ashdod port authority published a circular stating that “Ashdod Port Company continues to operate regularly and continuously. The operation is carried out in the format of an emergency routine, i.e., with restrictions of dangerous materials handling, and subject to the directives of Israel’s Home Front Command.”

Nonetheless, the security risks for goods transported at Israel’s Ashdod port are increasing. 

Risks are increasing

Recently, shipping line Evergreen proclaimed a force majeure on goods diverted from Ashdod to Haifa, saying it would no longer accept responsibility for the goods after they are discharged.

Force majeure alludes to an unforeseeable event that makes it either impossible or commercially impracticable for contracted parties to abide by their contractual obligations.

Meanwhile, Israeli shipping line Zim has told its customers that insurers are now demanding an additional war risk insurance premium on all vessels calling at Israeli ports. The premium is now being charged at cost on cargo to and from Israel, and is subject to changes every 24 hours.

Mick Aw, senior partner of maritime consultancy Moore Stephens, acknowledged that “if the Suez Canal is affected, ships will have to take the longer route around Africa. This will significantly increase the cost of shipping from places like Europe to Asia, including Singapore.”

Shipping of oil and other petrochemicals would also rise in prices with the prices of oil and gas tanker stocks having already risen moderately since the conflict, Aw continued. 

For the rest of the economy including other sectors, the economic and geopolitical uncertainties and potential supply chain disruptions that result from the conflict will be reasons for worry, Aw said.

Given experiences from the COVID-19 outbreak and subsequent government lockdowns, Aw pointed out that “freight rates can spike significantly during a period of supply chain disruptions.”

Oil prices initially soared after Hamas launched its surprise attack on Israel before moderating slightly, as per a CNBC news report in late October. 

“Any Middle East conflict sends tremors throughout the world economy because the region is one, a very crucial supplier of energy, and secondly … it is the key shipping passageway for global trade,” Pat Thaker, director of the Middle East & Africa region at the Economist Intelligence Unit, told CNBC.

The degree to which oil prices will rise, and the subsequent effect on the global economy, will be directly proportional to how geographically contained the conflict becomes, Thaker expounded, adding that the oil market was already facing pressure following Saudi-driven OPEC+ production cuts.

From October 1973 to March 1974, as the Yom Kippur war gave rise to an oil embargo on Israel’s supporters by Arab nations, oil prices rose to over 300 percent.

Furthermore, Thaker pointed out that the Israeli-Hamas war broke out at a time of “enormous economic uncertainty” as the Russo-Ukrainian conflict dragged on, with central banks attaining a tipping point in their monetary tightening cycles.

“For economies that are already in or heading for recession, further hikes from the Fed and the ECB could tip them over the edge,” Thaker stated to CNBC.

Although the extent of damage wrought on Gaza by Israel’s continued aerial bombardment will be tough to quantify and evaluate for some time, Thaker suggested economic disruption to regional countries was already happening in the form of massive protests.

In the “extreme scenario” of a regional escalation, Thaker predicted, markets will have to contend with Brent oil price over US$100 per barrel for a sustained period, which “means higher global inflation, softer economic growth” and “pretty much recession conditions”.

“Whether this conflict remains limited to a confrontation between Hamas and Israel or escalates into a broader regional conflict involving Iran’s proxy armed groups, notably Hezbollah, will have significant implications,” said Hamza Meddeb, director of the political economy program at the Malcolm H. Kerr Carnegie Middle East Center in Beirut.

Apart from the two central parties in the conflict, Israel and Hamas, Iran, a regional nuclear power, could become embroiled in tensions, prompting a possible U.S. response that includes ramping up sanctions on Iranian oil.

“A crackdown on Iranian oil exports could immediately remove somewhere from 1-2 mbd (million barrels per day) off (the) market almost instantly,” said hedge fund Cayler Capital’s founder and CIO Brent Belote.

In the unlikely event the U.S. mobilizes troops to the Middle East, Belote anticipated a $20 rise in oil prices, “if not more”. 

Nadia Martin Wiggen, director at commodity investor Svelland Capital, said that a regional conflict would disrupt oil tanker routes in the Mediterranean, Black Sea and around Türkiye.

Christian Roeloffs, chief executive of shipping and logistics platform Container xChange, said the economic uncertainties and potential supply chain disruptions due to the Israeli-Hamas war, depending on how long they last, could ultimately cause to a shift in the global transportation of goods, with Israel’s exports to China, the U.S., Germany and India likely the first to be affected. 

Pessimism about global trade prospects aside, more upbeat pundits have maintained that despite America’s military adventurism in supporting Israel, its ability to trade or negotiate would not be too impacted.

While global opinion of the U.S. plummeted by 30 or 40 percentage points in some European countries and falling sharply in middle-income Muslim nations after George W Bush’s Iraq war in 2003, the U.S. was still not a trade pariah.  

Exports as a share of U.S. gross domestic product bounced back in global trade to rise from nine percent of GDP in 2003 to over 12 percent in 2008, Bush’s last year in office.

Even if the Gaza conflict jeopardizes U.S. president Joe Biden domestically to the point that Donald Trump, the Republican Party frontrunner, is elected U.S. president next November, national self-interests would likely prevail in the long run.

Although trade is definitely more politicized than two decades ago during the Iraq war, most governments would probably pursue economic self-interest over political rhetoric. 

Thus, while rhetorical support for Palestinians has been a way for developing countries (and some Europeans) to question the U.S.-dominated political order, these parties are more likely to be pragmatic in their economic response to the Gaza war.

Photo credit: iStock/ Ralf Hahn