Implications of Iran-Israel Conflict on World Trade

In Blog, Energy Security
October 23, 2024
Zainab Shehzadi
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Author Recent Posts Zainab Shehzadi Latest posts by Zainab Shehzadi (see all) Navigating U.S. Pressure to Curtail Relations with Iran – November 15, 2024 26th Constitutional Amendment and Trichotomy of Powers – November 11, 2024 Theory of separation of powers: Is it possible in Pakistan? – October 30, 2024

After Iran’s missile attack on Israel, economic instability in the world is escalating along with rising geopolitical tensions in the Middle East. Financial experts believe that a full-scale conflict between Iran and Israel, two powerful nations in the Middle East, would have detrimental effects on international trade. The issue is peculiar since several groups and countries are indirectly supporting the two countries involved in the conflict. The escalating tensions in the Middle East is aggravating concerns about their adverse impacts on global markets and international trade.What potential implications might this crisis have on the movement of crude oil and LNG? Will this have an impact on Middle East’s oil supply to Asia? The prolonged confrontation between Iran and Israel has become a point of concern for global markets, prompting discussions about how it could have negative effects on the stability of international economy and trade.
Iran’s second direct missile attack on Israel incrased the global oil prices and more price hikes are expected depending on how Israel responds to the attack. The Strait of Hormuz, located between Oman and Iran, is considered the world’s most important oil transit route. Any unrest in the Middle East has the potential to sabotage the supply chain of crude oil that passes through the Strait. Rising oil prices may lead to already rising inflation in the world. There are limited alternative trade routes for oil suppliers to ensure exports keep flowing. According to a report, the overall operational capacity of Saudi Arabia and the United Arab Emirate’s alternative functional pipelines is estimated to 4.2 million barrels per day. The pipeline allows to reroute crude oil that would have otherwise passed via Strait of Hormuz. This amounts one-quarter of the average daily volume shipped via the Strait of Hormuz as of 2023 figures.The rising tensions between Iran and Israel can also disrupt liquefied natural gas (LNG) flows passing through the Strait of Hormuz. Global LNG supply is estimated to drop by around 250 million cubic meters per day. The loss of over 20% of worldwide LNG chain supply would require additional demand adjustments across key Asian and European energy markets. LNG supplies to Asian countries may be impacted specifically as Bangladesh, India, and Pakistan import up to 70% of their total LNG via Strait of Hormuz.The conflict has heightened the risk of disruptions along key shipping industries crucial for world trade. The Red Sea and Suez Canal routes are particularly vital shipping routes due to their ability to facilitate the movement of goods worth over USD 400 billion per year. The conflict is likely to impact global commodity markets, causing supply chain disruption among strategic trade routes. Shipping industries as well as the general security of maritime trade may also come under threat by the conflict in the Middle East.
Iran-Israel conflict has the potential to cause disruption in the global aviation sectors as well. There are possible risks of air travel safety, rising airfares, as well as risks to agriculture trade in the global market. It is anticipated that the Middle East crisis will increase global market inflation. Even while inflation may increase gradually, some prices, like airfare, will increase immediately.The United States intends to impose harsher sanctions on Iran in response to the country’s direct attack on Israel. The penalties target the country’s oil, petrochemical, aviation, automotive, gold, and precious stone industries. The European Union (EU) intends to impose sanctions on Iran in addition to the United States, and these actions may cause the price of oil to increase in global markets. Iran is a significant oil producer, and its strategic significance in the world oil market cannot be underestimated. China does not recognize US sanctions; thus, Iran may continue to send oil to its largest customer without any fear of penalties. However, the sanctions will undoubtedly affect oil trade with other key nations, such as Japan, Turkey, South Korea, Spain, and Italy.There are concerns about a potential major regional catastrophe, raised by the rivalry between Israel backed by its western allies vs. Iran. It exacerbates already-existing tensions and conflicts in the region. A full-scale war between Iran and Israel would ultimately impact every region. The ongoing conflict is expected to have an effect on global supply chain because of the disruptions in the flow of commodities in Asia and Europe. The global trade of crude oil and LNG is most likely to get most affected by the war between Iran and Israel. A sharp spike in oil prices may cause inflation to rise again and have detrimental effects on international economy.