Oil Shocks and Silicon Shortages—the High Cost of Geopolitics

Geopolitics is back. War in the Middle East is the latest in a series of shocks that demonstrate the power of politics to shape economic and market outcomes. There could be worse to come. Like Middle East wars of the past, the conflict between Israel and Hamas that broke out in October is a human tragedy with the potential to disrupt the world economy. A conflict largely confined to Gaza, similar to what followed the kidnap and murder of three Israelis by Hamas in 2014, would increase the already high cost in human life but likely have a limited effect on oil prices or global growth.

A sharper escalation—not a high probability but a distinct possibility—could bring Israel into direct conflict with its regional enemy Iran, a supplier of arms and money to Hamas. In that scenario, Bloomberg Economics estimates oil prices could soar to $150 a barrel, comparable to the move seen during the 1990-91 Persian Gulf War. That would drag 2024 global growth from 2.7% down to 1.7%—lowering output by about $1 trillion.