Any possible escalation of the war between Israel and Hamas poses a serious risk to the global economy, raising energy prices and disrupting key trade routes, economists cited by CNBC warned.

Diplomatic efforts by a number of international nations have intensified in hopes of limiting the fallout from the October 7 attack on Israeli civilians by the Palestinian militant group Hamas.

Israel’s subsequent bombing of Gaza in an attempt to destroy Hamas raised the risk of contagion in the wider Middle East region.

Israeli President Isaac Herzog said on Tuesday that while Israel does not want war with the Lebanese Hezbollah group, which recently exchanged fire with Israeli forces in the country’s north, Lebanon will “pay the price” if the two countries reach a full-scale spat.

The events of the past few days have heightened the greatest fear among economists that the conflict is sweeping the region and beginning to pose a long-term threat to the global energy and trade infrastructure.

“Any conflict in the Middle East sends tremors through the entire world economy because the region is, firstly, a very important supplier of energy, and secondly… it’s a key sea route for global trade,” said Pat Tucker, Director Middle East. East and Africa at the Economist Intelligence Unit, for CNBC.

Risks associated with oil and sea transport

The degree to which oil prices rise and the impact on the global economy will be directly proportional to how geographically limited the conflict becomes, Tucker explained, adding that the oil market is already strained by production cuts by OPEC+, an organization dominated by Saudi Arabia. .

She also noted that the war began at a time of “tremendous economic uncertainty” as the war in Ukraine continues to rage and central banks reach tipping points in their monetary tightening cycles.

“For economies already in recession or on their way to recession, further rate hikes by the Fed and the ECB could push them over the edge,” Tucker told CNBC via video link.

Oil prices initially rose after Hamas launched a surprise attack on Israel before easing slightly, although Brent crude futures were trading around $89 a barrel in Europe on Wednesday, while West Texas Intermediate futures were slightly less than $84 per barrel.

In an “extreme scenario” of regional escalation, markets would face Brent above $100 a barrel for an extended period, which “implies higher global inflation, weaker economic growth” and “closer to recessionary conditions.”

In a research note on Friday, strategists J. Safra Sarasin said oil production in Iran, the world’s eighth-largest producer of crude oil, would be at risk if the conflict escalates, especially if Tehran is hit again. strengthening US sanctions, which they estimate will remove up to 1 million barrels per day from global production.

“Furthermore, increased uncertainty about Saudi supplies could easily cause prices to rise to the same extent as the response to the 2022 invasion of Ukraine.

Then oil prices rose by 30% in just two weeks, settling around 15% above pre-war levels,” said J. Safra Sarasin, an analyst at Equity Wolf von Rotberg.

The Middle East hosts the busiest shipping routes, including the Suez Canal, the Red Sea, the Persian Gulf, and the Strait of Hormuz, increasing the economic risks associated with escalation.

“Any continuation of the war in the Sinai Peninsula and the Suez region increases the risk of an attack on the energy and non-energy trade that passes through the Suez Canal, which accounts for almost 15% of world trade, almost 45% of crude oil, 9% of oil tankers, and as well as 8% of LNG tankers heading this route,” explained EIU’s Tucker.

“You are suffocating these points and creating serious disruptions not only in the price of oil, but also in the entire global supply chain of energy and other goods,” he added.

Vulnerabilities of emerging markets

Any potential sustained increase in energy prices will be a concern for emerging economies, where energy often bears a greater share of inflationary pressures than in developed markets, said Elijah Oliveros-Rosen, chief markets economist at S&P Global Ratings. are developing

“In a typical CPI (consumer price index) basket, energy is about 10% in EM (emerging markets). In the US it is 6.9%, so obviously inflation has a bigger impact and also many developing countries have become net energy importers. So when you start thinking about which countries might be more vulnerable to higher energy prices and sustained higher energy prices, you have to start looking at net energy importers with large energy contributions to the CPI basket. There are countries like Chile, Turkey, several Asian economies like Thailand, the Philippines, India,” Oliveros-Rosen told CNBC at a news conference last week.

Paul Grunwald, global economist at S&P, said countries that have not yet anchored inflation expectations as their central banks tighten monetary policy could be vulnerable.

Reconstruction of Gaza

The extent of the devastation inflicted on Gaza by Israel’s continued aerial bombardment will be difficult to quantify for some time, but Tucker suggested that the economic disruptions in the region are already becoming evident in the form of large-scale protests.

Meanwhile, some future spending will serve the geopolitical interests of neighboring states, such as Egypt and the Gulf states, which seek to avoid a heated political climate within their own populations.

“It will be a huge reconstruction cost. Much has already been destroyed, likely to be funded by the Gulf states, which are also keen to remedy the situation. Saudi Arabia and the UAE are fully focused on economic diversification and acceleration through a number of major projects, so it is in their interests to have broader regional peace and security to focus on the domestic front,” Tucker said.