By George Hay
(Reuters Breakingviews) – Another geopolitical hotspot has started flashing red. With companies and investors already keeping close tabs on the war in Ukraine and growing tension between the United States and China, an outbreak of deadly violence in Israel adds the danger of contagion across the Middle East. And it’s erupting just as the global economy is in a fragile position.
Attacks by Hamas fighters on Saturday that have killed at least 700 Israelis are a different order of magnitude to the various flashpoints between Israel’s military and Hamas-controlled Gaza in recent decades. They are also deeply destabilising. Israel’s missile and land defences had been thought impregnable; evidence they aren’t may embolden its foes. Meanwhile, Israeli Prime Minister Benjamin Netanyahu’s coalition government is under pressure to mount a major response. Retaliatory strikes have killed over 400 people in Gaza.
Geopolitical risk-watchers can sketch out how things might escalate. Massive retaliation, or even an invasion of Gaza by Israeli forces, could lead to further action by Hamas or Lebanon’s Hezbollah. Both groups are backed by Iran, meaning a worst-case scenario would see Jerusalem and Tehran squaring off against each other directly. A conflict would undermine stability in the Gulf, which is responsible for 32% of the world’s annual supply of crude oil. That could boost inflation at a time when central bankers have already hiked interest rates and bond yields are rising rapidly.
One key player is Saudi Arabia. The Kingdom’s rulers have historically supported Palestinian rights and opposed Israel, while waging proxy wars against Iran. U.S. President Joe Biden had hoped to broker a normalisation of relations between Netanyahu and Saudi Crown Prince Mohammed bin Salman, which could have led to a beefed-up security treaty between Saudi Arabia and the United States.
Indeed, one motivation of the Hamas attacks may have been to provoke an Israeli response that derails those negotiations. However, Biden could also respond to Iran’s support for Hamas by toughening up sanctions on Tehran’s oil exports. Saudi could then play a stablising role in the oil global market. It has 3 million barrels of spare daily capacity – roughly the same as Iran’s overall output.
Yet investors have reason to remain on edge. The Middle East is far from the only region which has the potential to flare up. At a time when the global economy needs inflationary geopolitical risks to simmer down, more are flashing red.
Gunmen from the Palestinian group Hamas infiltrated Israeli towns on Oct. 7, killing at least 700 Israelis and escaping with dozens of hostages in by far the deadliest day of violence in Israel since the Yom Kippur war 50 years ago.
In response, Israeli air strikes hit housing blocks, tunnels, a mosque and homes of Hamas officials in Gaza, killing more than 400 people, Reuters reported.
President Joe Biden said on Saturday that Israel had the right to defend itself and issued a warning to Iran and other countries hostile to Israel not to exploit the attacks.
Israeli Prime Minister Benjamin Netanyahu on Sunday spoke with the leaders of Germany, Ukraine, Italy and Britain, who all expressed support of Israel’s right to defend itself “as much as it takes,” according to a statement from his office.
The Hamas attack was praised by Iran and by Hezbollah, Iran’s Lebanese allies.
Hezbollah said on Sunday it had launched guided rockets and artillery onto three posts in the Shebaa Farms “in solidarity” with the Palestinian people.
Saudi Arabia’s foreign ministry on Saturday called for “an immediate halt to the escalation between the two sides”. It also said that it “recalls its repeated warnings of the dangers of the explosion of the situation as a result of the continued occupation, the deprivation of the Palestinian people of their legitimate rights, and the repetition of systematic provocations against its sanctities”.
Brent crude was trading at $86 a barrel when oil markets reopened, up 2%.
(Editing by Peter Thal Larsen and Thomas Shum)
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