The world has witnessed heart-wrenching scenes in Israel and Gaza in recent days. The fact that this is one of the longest unresolved conflicts in the world does nothing to diminish the horror.
Thousands of lives have been violently changed forever, adding to the many lost over the years. It makes anything related to finance seem trivial, but this is an investment newsletter, and we must still ask whether these events can impact the broader world economy.
The roots of this conflict are deep and complex, and not for discussion here. It highlights how fortunate we are to have resolved our foundational conflict in 1994, accommodating the political aspirations of black and white South Africans. Though economic equality remains distant, the constitutional dispensation is settled, and provides a framework for progress. In contrast, a peaceful and just settlement between Israel and the Palestinians now seems further away than ever. One can only hope some good will come of this somehow.
This war comes at a precarious moment for a global economy absorbing a record surge in interest rates, so we have to ask if it can escalate into something even bigger and damaging to the rest of the world? It is important to note upfront that most regional or civil wars have little impact on world markets. The Russian invasion of Ukraine was different because of the outsized role those two countries play in food and energy markets. The October 1973 Yom Kippur War, when Egypt and Syria launched a surprise attack on Israel, had an even bigger impact on the oil price and the global economy.
Oil upheaval
Therefore, whenever there is upheaval in the Middle East – and sadly, this happens regularly – the first thing investors look at is the oil price. It is through oil that this region matters greatly to the global economy.
Beyond oil, the collective Middle Eastern economy is relatively small. Israel’s economy is about the size of the US state of Michigan, though it is bigger than South Africa’s. Despite its oil wealth, Saudi Arabia’s economy is about as big as Pennsylvania’s. Iran is also an oil-rich country, but years of isolation and economic mismanagement means its economy is smaller than Wisconsin, despite its population being almost 15 times larger.
Indeed, the lack of economic development in many Middle Eastern countries is both a cause and consequence of political volatility. But it has also long been the scene of great power hostilities, from ancient empires to the modern European ones, the Cold War, and more recently, the rivalry between Saudi Arabia and Iran.
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