Like past wars in the Middle East, the conflict between Israel and Hamas that erupted last week could potentially disrupt the global economy and even push it into a recession if more countries get involved. This risk is real as the Israeli military prepares to invade Gaza. A more significant escalation could draw Israel into a direct conflict with Iran. In this scenario, oil prices could soar to $150 per barrel, and global growth could drop to 1.7%, causing a recession that would subtract around $1 trillion from global production, according to a Bloomberg study.

Conflicts in the Middle East can send shockwaves worldwide because the region is a crucial energy supplier and a critical maritime passage. The 1973 Arab-Israeli war, which led to an oil embargo and years of stagflation in industrial economies, is the clearest example. The global economy is fragile, recovering from an inflation crisis exacerbated by Russia’s invasion of Ukraine and a pandemic that drained government coffers.

We have a precedent in the case of a limited conflict, with hostilities confined mainly to Gaza and Israel. In 2014, the kidnapping and murder of three Israelis by Hamas triggered a ground invasion of Gaza that resulted in over 2,000 deaths. The fighting did not spread beyond Palestinian territory. The impact on oil prices and the global economy was mitigated. The number of casualties last week is already higher. However, in such a scenario, a possible trajectory would essentially be a repetition of the tragic events of 2014 combined with stricter U.S. sanctions on Iranian oil.
Oil prices would remain around $100, and Saudi Arabia would be the big winner, replacing Iran. The impact on the global economy in this scenario would be minimal.

In the second case, the conflict would spread to neighbouring countries like Lebanon and Syria, which host powerful militias supported by Tehran, effectively turning it into a proxy war between Israel and Iran. Hezbollah, a Shiite political party and militia supported by Iran, has already exchanged fire with Israeli forces on the border and claimed to have hit an Israeli military post with guided missiles. If the conflict were to expand to Lebanon and Syria, where Iran also supports armed groups, it would become a proxy war between Iran and Israel, with different economic costs. Escalation in this direction would increase the likelihood of a direct conflict between Israel and Iran, likely driving up oil prices. During the short but bloody 2006 war between Israel and Hezbollah, crude oil prices jumped by $5 per barrel. Today’s equivalent move would raise prices by 10% to around $94. Tensions could also intensify more broadly in the region.
Egypt, Lebanon, and Tunisia are all mired in economic and political stagnation. Israel’s response to the Hamas attack could trigger protests. In the Arab street, the gap between anti-Israel marches and anti-government disturbances is narrow. A repetition of the Arab Spring, a wave of protests and uprisings that toppled governments in the early 2010s, is not unthinkable. Today, there is a strong dichotomy between the Arab street, still sensitive to the Palestinian cause, and governments looking the other way.
The global economic impact of this scenario would come from two shocks: a 10% increase in oil prices and risk aversion in financial markets, similar to what happened during the Arab Spring, which resulted in an eight-point rise in the VIX index. This would not lead to a recession but would limit global growth.

The third scenario involves an escalation to direct military exchange between the two regional enemies. The direction is the same in all these cases – higher oil prices, increased inflation, and slower growth, but the magnitude would differ. The more the conflict spreads, the more its impact becomes global. A direct confrontation between Iran and Israel is an unlikely but dangerous scenario. It could be the trigger for a global recession. Soaring oil prices and declining risk assets would hit growth hard and push inflation higher. No one in the region, not even Iran, wants to see the Hamas-Israel conflict escalate into a full-scale regional war. But that doesn’t mean it won’t happen, especially given the weight of emotions or the possibility of miscalculation.
Israel has long viewed Iran’s nuclear ambitions as an existential threat. Tehran’s efforts to build a military alliance with Russia, restore diplomatic relations with Saudi Arabia, and improve relations with the United States have added to the unease. Israel and the United States have sent conflicting messages regarding Iran’s complicity in the Hamas attack. “There is evidence they might have been aware,” said Israeli Minister of Strategic Affairs Ron Dermer. U.S. officials claim to have evidence that Iranian leaders were caught off guard, although they have described Iran as complicit in a broader sense because it finances and arms Hamas.
In an Israel-Iran confrontation, “Tehran would seek to activate its network of partners in Syria, Iraq, Yemen, and Bahrain. Iranian disruptive power is enormous and could have repercussions on the Western world.
Increased tensions between superpowers would add to a volatile situation in this scenario. The United States is a close ally of Israel, while China and Russia are deepening their ties with Iran. Western officials are concerned that China and Russia could exploit the conflict to divert attention and military resources from other parts of the world. With about a fifth of the world’s oil supply coming from the Gulf region, prices would soar. Crude oil prices may not quadruple, as in 1973 when Arab states imposed an embargo in retaliation for U.S. support of Israel in the war.
However, oil prices could increase as they did after Iraq invaded Kuwait in 1990. Starting from a much higher point today, such a spike could push oil to $150 per barrel. On the other hand, the unused production capacities of Saudi Arabia and the United Arab Emirates may not save the situation if Iran decides to close the Strait of Hormuz, through which a fifth of the world’s daily oil supplies pass. There would also be a more extreme risk aversion in financial markets, comparable to the 16-point increase in the VIX in 1990. Such a scenario would have a double impact: a global recession and a surge in inflation, leading central banks to raise interest rates again.