Oil Prices Shoot Up Amid Lebanon-Israel War. Will It Crash the World Economy? How Much Worse Will It Get?

On September 24, 2024, oil prices rose as the most deadly clash between Israel and Lebanon flared. Medi says 492 have died in Israeli air raids, the bloodiest day since the war broke out in 2006. This automatically fetched consequences to the world’s energy markets regarding likely supply interruption from the Middle East. The other factor is China’s economic moves to cut its key lending rates, which have also been instrumental in influencing the nature of the response from the market end.

The oil prices immediately reacted to the situation in Lebanon, witnessing significant increases. Brent crude oil futures for November rose 1.14% or 84 cents to $74.74 per barrel. West Texas Intermediate (WTI) crude futures appreciated 1.31% and closed at $71.29 per barrel.

Overview of Brent and WTI Crude Futures

• Brent Crude Futures: It gained 84 cents or 1.14% to close at $74.74 per barrel.

• WTI Crude Futures: Increased by 92 cents or 1.31% to close at $71.29 per barrel.

The primary driver of the rally is the Middle East conflict combined with more considerable macroeconomic changes, such as cuts in China’s central lending rates. While political instability in the Middle East inherently would impact oil prices, this latest rally indicates the sensitivity of the oil market towards regional conflicts and global economic policies.

Conflict between Israel and Lebanon

The latest oil price increases have been more the result of geopolitical concerns generated by the recent bloody clash between Israel and Hezbollah in Lebanon. Israel retaliated with attacks for a rocket attack that Hezbollah had launched into northern Israel. Such flare-ups often send shockwaves throughout global markets.

Casualties and Humanitarian Crisis

Lebanon has experienced widespread violence, which also claimed 492 lives, more than 1600 people were injured, and tens of thousands were made homeless. Any measures undertaken by Lebanon’s government to prevent such circumstances are futile since the economy and political climate have effectively destroyed the development of the country for too long.

Effects on Oil Market

The Middle East holds many of the world’s oil reserves, and anarchy in the region can potentially disrupt the global supply chain. Although neither Israel nor Lebanon is genuinely an oil-producing country to any great extent, tensions could easily spill over into other nations around the globe that control most of the world’s oil production, such as Iran. In particular, markets are vulnerable to the threat of oil shipments being affected in case of further escalation of tensions, and therefore, one could be seeing blockades or attacks on oil pipelines or shipping lanes.

Economic Policies

Apart from geopolitical tensions, it is also apparent that the series of recent moves by Beijing to boost its slowing economy played an important role in determining oil price dynamics. The same day China’s airstrikes smote Lebanon, the central bank lowered key lending rates to 3.85% from 3.95%. This is part of the complete government package to stop the economic slowdown and prevent deflation.

China’s Economic Slowdown

China is the world’s largest importer of oil. It presents whether other countries are economically sound or not. The past couple of months revealed China has been suffering from slowing growth; its slowness was still rooted in weaker demand for exports and internal economic problems. Yet, it made a series of monetary policy moves to revive consumer spending and investment.

Impact on Oil Prices

The stimulus efforts of China have raised hope that the country’s economy might rebound and be a source of increased demand for oil. However, geopolitical risks in the Middle East have also helped to push oil prices up sky-high. Some analysts have warned that the long-term sustainability of China recovery is far from assured as long as the monetary policies are not followed up with fiscal measures, government spending for increased infrastructure or social programs. 

The oil price rise will impact the economies at large. The impact will be pertinent on those economies which rely absolutely on importing and exporting oil, whereas significant impacts are expected on various sectors, in multiple aspects.

Inflationary Pressures

One of the most obvious side effects of high oil prices in this regard is inflation. Higher oil prices normally inflate production, transportation, and manufacturing costs, raising the prices of goods and services. Such a situation tends to cause erosion of consumer buying power, and further retards economic growth.

Analysts predict that an oil price increase, which is held above $90 a barrel, will bring inflation rates higher or propel them more steeply up to the totals seen in oil-dependent economies. According to the IMF, a $10 rise in the price of oil drives inflation up by 0.5% in emerging markets and 0.2% in developed markets.

Developed Economies Most likely to be severely affected by higher consumer prices are developed economies, including the U.S. and the European Union. Those countries highly dependent on transportation and manufacturing will take the most significant impact from consumer price increases. Energy-intensive industries most likely to be severely affected include aviation and shipping.

Inflation is likely higher in countries like India and Brazil since these nations are net oil importers. For instance, India imported more than 80% of the oil it needed. Therefore, continued long-term upward trends in price would imply costly costs for businesses and consumers and may, therefore, slow down the economy’s growth.

A Slowing Down of Global Economic Growth

As warned by the World Bank and other financial institutions, high oil prices may turn out to be quite dampening to the growth in the world economy. The high cost of energy reduces profitability, slows investments, and cuts consumer spending.

The new studies suggest that an increase in oil prices by $10 can result in a loss of about 0.2% in global GDP growth. In addition, if a country is already challenged economically, such as high inflation or flat growth in Europe, the impact will become even more detrimental.

Energy-intensive industries such as manufacturing, transportation, and agriculture will be the hardest hit industries because of the brunt of high oil prices. Higher costs, low margins, and, in some places, cost prices may be passed on to consumers will haunt these sector companies.

Impact on Oil-Producing Nations

For oil-exporting countries, higher prices can be more than welcome relief in the form of much-needed revenue increases for those economies mainly driven by oil exports. Nevertheless, alluding to such perspectives could benefit them however, such a scenario is cloudy as the geopolitical situation in the Middle East worsens and stifles the supply.

In the short run, these beneficiaries of the situation are the major oil producers and exporters like Saudi Arabia, Kuwait, and Iraq, who are central in the Middle East. Higher oil prices will push the oil revenues of these countries higher, helping them shore up public finances after years of derailed oil prices due to the COVID-19 pandemic and other economic shocks.

In fact, Russia will also benefit from higher prices. As a major oil and gas exporter, the price increase will work to its advantage in many ways. Sanctions on the country due to the Ukraine invasion remain a dark cloud.

Oil-Importing Nations

It is a big headache for countries that import a lot of oil as rising prices hit them more severely.

India: Because it is one of the most destructive oil importers, India has maximum exposure to price shocks in crude oil TM. Their economy is so dependent on oil, in this case, the increase in price will only bring aggravate of the inflation, slow economic growth rates, and worsen trade balance for country 

Europe: As for the European countries, the foreign economic growth will be restrained since most of them have not restored their economies’ self-confidence, which has been shocked by the deadly virus covid 19. Other factors that impact 

European economies will experience a rise in oil prices, which will increase energy, transportation and manufacturing.

Market Volatility and Future Price Projections

Even though the proximal factors surrounding the conflict in Lebanon are currently determining oil prices, analysts warn that the market will still be unsettled for months. Some factors determining whether oil prices keep surging or stabilising are discussed below.

Lebanon and the broader Middle East remain highly unstable. If tensions between Israel and Iran escalate and spill over to other places in the region, it could have a more significant impact on global oil supplies. For example, if tensions between Israel and Iran were to increase, it would spur the risk of disruptions to oil shipments that pass through the most critical maritime routes-the Strait of Hormuz-to rise drastically.

Iran’s Involvement- Since Iran is a major supporter of Hezbollah, its intervention into the conflict would widely affect the oil market. If Tehran were to get fully involved in the conflict, oil production and transportation disruptions could lead to a high rise in oil prices.

OPEC+ Production Decisions

The OPEC+ alliance, which is the Organization of the Petroleum Exporting Countries and its allies, has a significant role in determining the world’s oil supply. The production limits OPEC+ has been so careful about for the past few years may no longer be controlled; hence, changed production policies will impact oil prices in the coming months.

If OPEC+ increases its output to reduce rising prices, it might balance the market. However, when output is decreased due to supply shocks or issues related to geopolitics, prices could shoot upwards.

World Economic Recuperation

This is partly because an easing of the global economic recovery from the COVID-19 pandemic and recent slowdowns in major economies will go a long way in determining oil demand. Improved implementation of policies in major economies, especially China, might lead to a higher demand for oil, which increases prices.

The steep rise in oil prices as a consequence of the Israeli airstrikes in Lebanon best exemplifies how the two dynamics are interwoven, geopolitics and global economic dynamics. While the tensions in the Middle East churn anew, and while China readies itself to give its moribund economy a resurgent breath, the global marketplace for oil floats in limbo.

It is a windfall for oil producers in the short term, but the long-term scenario is riddled with uncertainty. For oil importers, it presents a far more ominous outlook; its twin price payments mandate higher inflation and slower growth in economic activities. Besides, the energy cost would be higher too.

The future oil price will eventually be determined by the complex interplay between geopolitical risks, economic policies, and market sentiment. Therefore, no one would forecast oil prices, whether the price forecast is based on daily or monthly predictions. Businesses and governments worldwide must anticipate fluctuation and alter plans according to the scenario ahead.