Renewed hostilities in the Middle East new challenge

The escalation of the war in the Middle East in the last few days will add more volatility to the region and cause anxiety worldwide because of the possible impact on the global economy. The effect is already reflected in crude prices, which have risen by around four per cent. In the early hours of trade, the BSE Sensex, however, was in the green, but hostilities in the Middle East and ensuing higher oil prices are likely to negatively impact the capital market in India and elsewhere. Tehran’s intransigence, evident from strikes on commercial shipping, is the root cause of the rising tensions in the region. Earlier, it was intercepting oil tankers in the Strait of Hormuz and firing missiles at US military installations in neighbouring countries; now, its proxies, the Houthi rebels in Yemen, too have joined in. On July 20, the Houthi militia warned shipping companies not to load or discharge cargo at Saudi Arabian ports; they made it clear that they would risk attack by doing so. The threat being real, Beijing decided to hold direct talks with them to ensure that its tankers sail through the southern Red Sea safely.

The New York Times quoted Farea al-Muslimi, a Yemen-focused fellow at the London-based research group Chatham House, as saying, “The Houthis have one solution for every problem in the world, which is go to war.” The Saudis solve every problem by trying to shower it with money, and the Houthis by shooting at it, he added. Not to be left out, Iran-backed armed groups in Iraq are also getting ready for war, triggering joint strikes on them by the United States and Saudi Arabia. The operation followed the interception of Iranian ballistic missiles fired at American forces by the US Central Command. While the war is heating up in the region, it is unlikely to have a cataclysmic effect on the global economy. Several structural factors are expected to prevent it from becoming a full-blown global economic crisis. Financial markets react sharply to geopolitical developments in the short run, with investors seeking safe-haven assets and commodity prices, especially crude oil, witnessing temporary spikes. But until the conflict spreads to major oil-producing countries or significantly disrupts global energy supply routes for an extended period, its broader economic impact is likely to remain contained.

The world economy today is not as vulnerable to oil shocks than it was in the 1970s or recent decades, owing to diversified energy sources, strategic petroleum reserves, and better coordination among major economies. Still, the conflict could post major challenges to countries like India, which are heavily dependent on imported crude. Costlier energy tends to fuel inflation, widen trade deficits, and put pressure on national currencies. Growing freight and insurance prices caused by insecurity in the Red Sea and the Strait of Hormuz may also increase the cost of international trade, jacking up global supply chains and pushing up the prices of imported goods. Central banks may find it more difficult to balance inflation control with economic growth if energy costs remain elevated for a prolonged period. The challenge now lies in containing the conflict and ensuring that critical shipping lanes remain open, thereby preventing temporary disruptions that a prolonged economic shock can cause.