What are the economic consequences of the Israeli-Hamas conflict?

What does the ongoing conflict between Israel and Hamas mean for the regional and global economy?

In general, the economic consequences of the recent Israeli-Hamas escalation could be divided into regional and global impacts.

In the short term and on the regional level, the Israeli economy could suffer a lot. According to a recent estimation of the Israeli Hapoalim Bank, the conflict would cost around 27 billion NIS (or 6,8 billion USD). The size of this conflict could be only comparable with the 2006 intervention of Israel in South Lebanon against the Hezbollah, which cost surged to 9,4 billion NIS.  According to expectations, the costs of the intervention in Gaza and of course depending on the length of the actual/possible occupation may become several times higher compared with the last one. Israel has mobilized 300,000 reservists to the army; they left their jobs temporarily, and there is a need to cover their salaries and the gap in production. The actual costs of the war, however, largely depend on whether Israel would engage in a two-front war, including Hezbollah as well, or the armed intervention would be limited to the Gaza Strip. The military superiority of Israel could be questioned in this conflict; however, occupying the Gaza Strip, even for a short amount of time, would have an additional negative effect on the Israeli economy.

Another feature that we should emphasize is the damage to the Israeli economy’s image. There are some expectations that Moody’s would lower Israel’s credit rating to a negative; the Israeli currency, the Shekel, could lose its value; and we have not even mentioned the loss of tourism revenues and other business activities that depend on the stability of the region. For Israel now, security comes first. However, there should be an economic plan to modify the budget should there be no short-term ceasefire on the horizon. Politically, the unity government, which has been recently formed in Jerusalem, helps these decisions; however, it is not sure how will be the current Israeli government affected by this crisis in terms of its political stability.

For the duration of the conflict, at least, the bilateral economic activities, especially between Israel and the United Arab Emirates, could come to a halt. In three years since the Abraham Accords, over one million Israeli tourists entered the United Arab Emirates, showing this initiative’s success. The humanitarian costs on both sides could be very high. Israel will destroy several critical infrastructures in the Gaza Strip, which should be rebuilt in the future. In Israel, Hamas has damaged a number of properties with the rocket assaults as well as physical attacks, not to mention the vast human costs of this conflict.

However, the main concern for the global economy is the potential impact of the conflict on the global energy market. Since the beginning of the conflict, Israel has decided to shut down its largest gas field Tamar, which accounts for 70 % of the Israeli production. Tamar is an offshore field located 25 kilometers from the Southern city of Ashdod. From here, Israel exports gas to Jordan and Egypt. The latter produces LNG from the gas, and reexports it to international markets. The Eastern Mediterranean gas fields have considerable potential for the European energy market; however, any political instability could damage economic investments. The direct consequence of the temporary halt of production is the increase of gas prices by 29 % during the first week of the conflict. Although the United States has sent two of its air carriers, it would not have a direct impact on the security of the gas fields, rather, it is an asset of deterrence against Iran to prevent any potential escalation of the conflict.

There are other gas fields, which could be impacted by the ongoing conflict too. There were huge expectations about an Israeli-Lebanese cooperation to explore offshore gas field near the coasts. In 2022, the United States brokered an agreement between Israel and Lebanon to demarcate the sea border aimed at launching drilling in gas fields along its lines. Due to the conflict, any cooperation/investment seems to be impossible in the foreseeable future.

Although Israel is not an oil producer country, but the fear of a regional escalation caused an increase in oil prices. Brent crude oil costs more than 90 USD/barrel, which could have short-term positive effects on the oil-rich countries’ budgets, including Saudi Arabia and Russia, but it can also prolong global inflation.