Economically, Israel is not facing multi-front war yet

ELIE PODEH January 2024
Op-eds / The Gaza Campaign

The current war on Hamas in Gaza is the first in the Middle East which has not led to a rise in the price of oil. Just before the start of the war, the barrel price for crude oil was $83. On October 20, ahead of Israel’s ground offensive in Gaza, it rose to $89. Since then, the price plummeted to less than $74 per barrel as of December 20 – this, despite the announcement by the OPEC Plus states of cuts to oil production; despite the firing of rockets by the Houthis on merchant ships and oil tankers in the Bab el-Mandeb Strait; and despite the announcements by several major shipping companies, as well as the oil giant BP, that they are suspending shipping via the Red Sea until further notice.

The Yom Kippur War (1973) saw dramatic rises in oil prices, especially after the declaration by the oil-producing states of a boycott against countries supporting Israel, headed by the United States. The same occurred after the outbreak of the Iran-Iraq War in 1980, the Iraqi invasion of Kuwait in 1990, and the US invasion of Iraq in 2003. There was even a price increase during the first days of the Second Lebanon War in 2006, although neither Israel nor Lebanon are neither oil producers nor major junctions for the transportation of oil. And finally, oil prices climbed sharply after the Russian invasion of Ukraine, last year. The reason behind such price increases in response to wars is clear: fear of disruption of the production and/or transportation of oil. But this time, after a few days of moderate rises, oil prices fell to below where they were before the war.

In addition to the oil market, the general public has also responded with moderation. Since the beginning of the war and despite the actions of the Houthis (who also launched a drone attack on Abu Dhabi airport in January 2022), there has not been a noticeable effect on the number of tourists traveling to Dubai and Abu Dhabi; or to Doha, the capital of Qatar. Indeed, the last quarter of 2023, all of it overshadowed by the war in Gaza, was the best so far for tourism to the Gulf – better even than the equivalent quarter of 2019, just before the COVID-19 pandemic.

The lack of negative impact on holiday bookings or flights to the Gulf for the coming months indicates that the “world’s citizens,” along with the large international tourist agencies, believe that the war is not set to expand and that Iran, which borders the United Arab Emirates (UAE), will not join the fray. Similarly, the forecast for the Qatari economy published at the end of November by the International Monetary Fund (IMF) mentions neither the war itself nor the impact of the Houthis’ actions on economic trends in the Persian Gulf – the world’s most important oil production and transportation region.

It is not only the oil and tourism markets that are predicting that the war will not spread to other theaters. The Israeli stock market, it would seem, is behaving in a similar manner. During wartime, November saw sharp rises in share prices after some major falls in October. The first three weeks of December also brought continued increases on the Tel Aviv Stock Exchange, and the TA-35 Index climbed by almost 3% over this period. In addition, the past month has seen a more moderate trend in the scale of withdrawals from funds invested in bonds issued by Israeli companies.

The value of the shekel

AND THIS is not all. On the eve of the war, the dollar-to-shekel exchange rate stood at 3.86. On October 27, the day after the beginning of Israel’s ground offensive into Gaza, the dollar climbed to NIS 4.08, its highest rate for 11 years. It is entirely logical for market uncertainty to drive investors to the safer shores of the dollar. Yet the dollar rate has now fallen far below where it was before the war, reaching NIS 3.65 shekels on December 19, 40 agorot lower than before the ground offensive.

Credit card purchases by Israeli consumers, which dropped by 25% in October relative to the previous month, are also now joining the trend for improvement. In November, they climbed steeply from October levels, and the same will seemingly be the case for December.

All this data indicates that since the beginning of the ground operation, and increasingly over the last two weeks, more and more institutions and Israeli citizens have reached the conclusion that the war will not expand into additional theaters.

What are the reasons behind the seemingly relaxed response of the markets? There are several possible explanations: First, the markets and the citizens of countries around the world, including Israel, are behaving as if this is a limited war – just another round of fighting against Hamas, like Operation Protective Edge in 2014, but at a higher intensity. Thus, the economic impact, in their assessment, will also be limited.

Second, the statement by United States Secretary of Defense Lloyd Austin announcing the formation of an international naval force headed by the United States to prevent the Houthis from closing Bab el-Mandeb will restrain rises in oil prices and shipping costs. Closing the strait would constitute a declaration of war, not only against Israel but against the Western economy, after it has only recently managed to rein in the inflation that followed Russia’s invasion of Ukraine. And finally, a war in the North against Hezbollah does not currently seem to be on the cards, and it would appear – at least according to the behavior of the financial markets – that the confrontation between Hezbollah and the IDF will remain restricted to daily clashes close to the border fence.

Still, if one of these threats is indeed realized – if the northern front expands into an all-out war between Israel and Hezbollah, or if the Red Sea is closed to shipping by the Houthis – then the energy market will respond with sharp increases in fuel prices. It seems safe to assume that President Joe Biden will make every effort to prevent such an outcome during an election year.

The article was published on January 2, in the Jerusalem Post.

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