From Ukraine war to Middle East war: Another huge blow to global stability

12 October 2023 16:45 RaboResearch

In a year marked by conflicts around the globe, we consider the wide spectrum of Middle East war scenarios following the October 7 Hamas attack on Israel. A war that escalates beyond Israel and Gaza is likely to have a wide range of destabilizing effects – both direct and indirect – on geo-economics, geopolitics, and markets.

Four Israeli soldiers stand behind razor wire near the Palestinian village of Bil'in in the West Bank

The global insecurity order

The global security order is crumbling. In 2021, Afghanistan collapsed as a US client state, returning the Taliban to power. In February 2022, war began in Ukraine. And 2023 had already seen four anti-Western coups in Africa; civil wars in South Sudan and Ethiopia; a map-changing victory for Azerbaijan over Armenia in Nagorno-Karabakh; fears of more map-changing war in the Balkans; carpet-bombing of civilians in one pocket of Syria and Turkish actions against Kurdish forces backed by the US in another; and rising tensions in the South China Sea between the Philippines, again backed by the US, and China. Now the year sees a Middle East war too.

Palestinian Hamas’s ISIS-style attack on Israel on October 7 – on the 50th anniversary of the Yom Kippur War, during the Jewish day of rest, and again on a religious holiday – killed over 1,200 Israelis, injured over 3,000, left hundreds missing, and saw 150 hostages taken into Gaza, including many dual-nationality US citizens, all of whom may now be executed. Nine hundred are also dead in Gaza after Israel’s initial military response.

Israel just experienced its 9/11 or Pearl Harbor: first, in terms of the intelligence failure; second, in its scale of casualties; and third, in its determination to strike back hard. Israel has declared war for the first time since 1973, with 300,000 reservists called up to back Prime Minister Benjamin Netanyahu’s stated goal of toppling Hamas entirely. Indeed, Israel has stated it aims to redraw the status quo in a way that will be felt for 50 years.

Yet this is not just about Gaza. Iran is blamed as financer and planner for the October 7 attack by some, which escalates matters. As the US sends the USS Gerald R. Ford carrier group to support Israel, and soon maybe another, Russia is seen as backing Iran, reciprocating Iran’s backing for Moscow versus Ukraine. China, seen as standing too close to Russia by Europe and the US, signed a 25-year cooperation deal with Iran in 2020, and brought it into the BRICS-11 this summer.

In short, this is a highly complex, dynamic picture with many outside actors – and now a powder keg into which matches are being thrown.

Likely implications

Once wars begin it is impossible to predict where they will end and how, more so in what is now a global insecurity order. However, we can already underline a few key logical developments:

  1. The gloves are off for Israel. October 7 will change its politics and those of the Middle East. This policy shift will echo around the region, and the world.
  2. An epochal Saudi-Israeli peace deal and US defense guarantee is history – at least until the victor of this conflict is clear.
  3. Planned India-Middle East-Europe trade corridors and railways are also over for now, as is the proposed Turkish alternative. Maybe even China’s Belt and Road Initiative from Asia to the Middle East hits a huge crater.
  4. Iran is being blamed for having helped plan and finance the October 7 attack. This only adds to the evidence of an emerging axis of Russia, Iran (and Syria, Hamas in Gaza, the Houthis in Yemen, Hezbollah in Lebanon, and militias in Iraq), North Korea, and China.
  5. Can the US draw the line between support for Israel and not getting sucked into another Middle East conflictin an election year? That latter fact is well known to everyone in the region, which reduces the power of US deterrence.
  6. A Middle East war will accelerate global bifurcation. Indeed, October 7 may prove as epochal as 9/11. Then, even Iran, Russia, and China backed the US against Al-Qaeda, but the world is now deeply divided. If the West doesn’t back Israel, it will show huge weakness. If it backs Israel, the Global South – India and the Philippines aside – will again see it as hypocritical, to Russia and China’s gain. And if Europe moves away from Israel when the real fighting starts, the US will see the EU as hypocritical. In short, far greater global division lies ahead at a time when supply chains are already shifting geopolitically.
  7. It remains to be seen if Saudi Arabia will maintain its recent rapprochement with Iran after the latter destroyed Riyadh’s hopes for an Israel peace and US defense deal. However, note that the United Arab Emirates, always close to Saudi Arabia, has largely backed Israel so far while warning regional actors not to step in. That may be Riyadh speaking via ventriloquism despite its own pro-Palestinian statements.
  8. What The Economist just called “homeland economics” will get further traction from social media images worse than the TV drama Homeland (first written by Israelis).
  9. Military spending will soar. As Russia shifts to a war economy, Europe already cannot help Ukraine without US arms. The US might need to dip into its dwindling stocks of weapons and shrivelled military-industrial production base to help Israel. And this is as the Pentagon wants to pivot to Asia, where China can outproduce it on every front.
  10. Hard choices will need to be made on who gets the weapons stock available now: Israel, Ukraine, or others?
  11. This backdrop again underlines Europe’s particular strategic vulnerability as a pacifist free trader in a violent mercantile age.
  12. This war will likely have a major flow-through to fiscal, monetary, and industrial policy, and then to markets. Few current participants have any memory of living through a genuine extended war economy. Looking to historical precedent, the impacts on fiscal deficits (higher), inflation (higher), commodity prices (higher), asset markets (lower), and FX markets (wilder) are unlike those we see during peacetime.

Having made these points, we now turn to trying to project three brief scenarios for how this war could potentially develop going forward.

War scenarios


An Israel-Hamas war would be tragic, but the impact on the global economy and markets is limitedunless Israel were to lose the ground war in Gaza, which would be a huge shock to the collective West, to say nothing of Israel.

Israel (US)-Gaza-Lebanon-Syria-Jordan-Egypt

If Israel starts a ground war against Hamas, Hezbollah will start its own assault with its huge missile stock. This would soon deplete Israel’s Iron Dome defenses, making mass casualties inevitable, with a matching Israeli response against Lebanon, which is already close to being a failed state. Israeli media reports France was recently used as conduit to transmit the message that should Hezbollah attack Israel, US forces would hit back against Hezbollah, dragging the US in. Israel has separately warned it will attack Syria if Hezbollah attacks it. Notably, Israel has already exchanged limited fire with Hezbollah and with Iranian militias in Syria.

Jordan and Egypt could also be destabilized. Egypt has an election in December: Its pro-Palestinian population is already seething about high inflation, and two Israeli tourists were shot dead by a policeman in Alexandria on October 8. If Jordan and Egypt back Israel, Hamas could also target them. Note that the Suez Canal runs through Egypt: What if Hamas were to attack an oil tanker in the canal, blocking it to global trade?

Israel could find itself under “existential threat,” in the words of a former senior security official, if it faces a multifront war from Hamas, Hezbollah, Iranian militias in Iraq and Yemen, an Iran-instigated intifada in the West Bank, and from radicalized Israeli Arabs inside the 1967 Green Line. Again, this presents a huge potential shock to the West.

In almost all of the above scenarios, Europe could face a new wave of refugees at a time when anti-immigrant political populism is already soaring.

Israel (US)-Hamas-Lebanon-Syria-Jordan-Egypt-Iran-Saudi/Gulf

With Iran blamed by some as responsible for October 7, there is a risk Israel may target it– something long whispered over Tehran’s pursuit of a nuclear weapon. Naturally, Iran would then attack Israel, Jewish targets worldwide, and maybe pro-Israel Western governments, as well as Saudi Arabia, and/or oil tankers in the Strait of Hormuz. This could risk dragging the US into another open-ended Middle East war, with Russia (and China) backing Iran. Even in a much milder scenario where the US merely opts to enforce oil sanctions against Iran properly – that is, not allowing sales to Beijing (exacerbating US-China tension) – Tehran could destabilize Hormuz by harassing oil shipping, as it has done often of late.

War it is: The only is issue how bad it gets

In short, war in the Middle East looms. The scale is unknown, but wars have a worrying tendency to escalate. There is already a worryingly wide spectrum of worryingly possible future outcomes shown above – and these exclude the possibility that war spreads even further, as it has from Ukraine to the Middle East. Yet if the Pax Americana continues to crumble, many may ask: Where next?

That is even more the case when key players such as Russia arguably stand to gain more from destabilizing things than helping maintain “business as usual.” Moreover, other actors may see a window of opportunity for action with the US tied down militarily on two fronts.

In that light, we now look at the potential impact of the above three war scenarios on global energy markets and some key aspects of agri commodity markets.

Energy impact


Israel and the Gaza Strip are miniscule players in energy markets. Neither Israel nor the Palestinian territories have oil output. Israel ships gas from the Tamar gas field (28.2m cubic meters/day in 2022) and Leviathan gas field (31.2m cubic meters/day) to Egypt. This then flows into wider Mediterranean consumption via pipelines or as LNG.

In response to October 7, Israel has temporarily closed Tamar. If the conflict stays contained, energy markets will adjust quickly. The loss of Tamar will throw support under European TTF, PSV, and MIB gas, but the effect will be moderate. A colder-than-average winter or further Norwegian flow reductions in conjunction with a long Tamar shutdown will keep margins for LNG from Qatar or the US to Europe comfortable. The USD 3/bbl rise in crude prices on October 9 was mainly due to increased fear/risk premiums and would reverse with time in this scenario.

Israel (US)-Gaza-Lebanon-Syria-Jordan-Egypt

The Suez Canal is one of the world’s great trade chokepoints, with 15% of global trade, 4.5% of global crude oil, 9% of refined products, and 8% of LNG tankers transiting through it. Additionally, the Sumed Pipeline runs parallel to the canal, transporting about 80% of the oil shipped from the Middle East to Europe. If the pipeline halts operations due to the conflict, or the canal is blocked by a destroyed tanker or container ship, the alternate route around the Horn of Africa adds two weeks of logistical travel time – at significant cost. Any expansion of war into the Sinai Peninsula and Suez region risks triggering such events.

While not catastrophic, European TTF gas would soar into EUR 80+ territory, and our current forecast of USD 100/bbl Brent crude would materialize, likely sooner than in our current base scenario. Initial volatility would subside as flows are redirected, but as long as the Sumed or Suez are inoperable or reduced in capacity, we would expect asymmetrically positive price movements.

Israel (US)-Hamas-Lebanon-Syria-Jordan-Egypt-Iran-Saudi/Gulf

Currently, Iran produces 3m barrels of crude per day, with about half exported to China. Furthermore, it has claimed dominion over the Strait of Hormuz, another major chokepoint for the global energy market that transits 17% of world oil flows as well as Qatari LNG. Notably, the strait has never been fully closed, even in the Tanker War of 1984 when Iran and Iraq routinely destroyed each other’s shipping. Yet in the past seven years, as part of a proxy war against Saudi Arabia, Iran has stepped up efforts to seize vessels and harass merchant shipping there.

We would stay above USD 100/bbl crude in a scenario where the US enforces ironclad sanctions on Iranian oil while safeguarding “allied” tankers. This could come at a huge cost to the US Navy given Iranian drones and cruise missiles might attack them (as seen in the Ukrainian conflict). Oil prices would obviously rise further if the US then struck Iran back.

Meanwhile, a single bloody hour could change the course of global oil markets for a decade, seeing Brent at well above USD 150. US Senator Lindsey Graham has publicly stated the US should threaten Iranian oil infrastructure, with Israel, if necessary. Israel and Saudi Arabia have their own missiles (and/or planes) to attack Iran, and Iran the Saudis and Israel. Either side could also use drone attacks, as Iranian proxies did in 2019, briefly cutting Saudi oil production by half, affecting 5% of total world output at the time.

Additional releases from the US Strategic Petroleum Reserve (SPR) would prove a bandage for a gunshot wound. The SPR is much depleted, and will need to be replenished at some point via increased investment in aging oil and gas fields and increased drilling and exploration – which seems unlikely given the political bias against fossil fuels.

Food and agriculture impact


Israel is an important exporter of potash and phosphorus: In 2022, it exported 6% of the world’s potash and 8% of phosphate fertilizers. It remains to be seen how much of those trade volumes will be impacted in the coming months. Israel is also a minor importer of grains, meat, dairy, and vegetable oils.

Overall, farmers around the world might feel a somewhat negative impact due to potentially rising costs of energy and fertilizers at the margin, as well as slightly lower import demand and prices for grains and oilseeds.

Israel (US)-Gaza-Lebanon-Syria-Jordan-Egypt

Lebanon isn’t a major exporter or importer, but the wider Middle East and North Africa (MENA) region is a major exporter of fertilizers and a significant importer of grains and live animals, as well as a relevant importer for dairy and meat. If the conflict spreads to Egypt in particular, it could temporarily result in lower grain prices due to demand concerns.

If trade blockages were to occur at the Suez Canal, it would likely prove manageable, if costly, for food and agriculture trade. The Suez is highly relevant for the supply of grain imports from the EU, Ukraine, and Russia to Middle Eastern countries as well as to East Africa, but those shipping route issues are likely manageable.

The same is true for export shipments of fertilizers from the region, which pass through the Suez Canal on their way to the import countries of the world. In short, we’d expect the trade of staple foods to resume rather quickly, but maybe with some changes in origins. The likes of Russia would likely step in and resume delivery instead of other suppliers.

Israel (US)-Hamas-Lebanon-Syria-Jordan-Egypt-Iran-Saudi Arabia

Fertilizer export issues and grain imports would become far more serious in this scenario. About 30% of the world’s nitrogen fertilizer exports derive from MENA (top 5: Qatar, Saudi Arabi, Egypt, Oman, and Algeria), with more than 25% of global mixed fertilizer exports (top 3: Morocco, Saudi Arabi, and Israel), around 10% of potassic fertilizers (top 3: Israel, Jordan, and Egypt), and almost half of phosphatic fertilizer exports (top 5: Morocco, Israel, Egypt, Lebanon, and Tunisia).

Even more important than the direct exports could be the impact of rising energy costs on the global production and supply of nitrogen fertilizers. Their prices are very sensitive to energy price increases, as seen in Europe following the dislocation of the EU’s energy supplies from Russia. Urea prices shot up to record levels due to fears of EU suppliers cutting production dramatically and global supply at risk of falling well below demand.

In grains, the MENA region has shown a large increase in imports over the past few years and now accounts for almost a quarter of the world total, with Iran and Saudi Arabia accounting for over 15m metric tons each and Egypt importing more than 20m metric tons. In meat, Israel is among the top 5 global live sheep importers, with 5% of the world total, and the rest of the MENA region accounts for over two-thirds (top 5 importers: Saudi Arabia, Kuwait, Jordan, Qatar, and Israel). The region also imports 20% of the world’s live cattle, 12% of global dairy, and 7% of global meat.

In short, farmers everywhere would feel the impact in a variety of ways.


This has been a necessarily brief snapshot of the likely spectrum of potential Middle East war scenarios. Hopefully it underlines that even for those with no direct exposure to the region, a war that escalates beyond Israel and Gaza is likely to have a wide range of destabilizing effects, both directly and indirectly. Geo-economics, geopolitics, and markets could all experience far more extreme bifurcation, polarization, and violent volatility.

As such, as the world looks to the Holy Land, it’s time to pray for the best.

Figure 1: The Greater Middle East region

Western Asia, geoscheme and political map. Subregion of Asia, used for statistical purposes, covering geographical regions spanning from Anatolia, Caucasus, Levant, Mesopotamia till Arabian Peninsula.
Source: GettyImages, Peter Hermes Furian