“Can Distant Turmoil Fuel Our Local Struggles?”
You wake up, go out, and find the street quieter than usual, with the buzzing of horns missing. You may be happy at first but later realize that fewer cars are cruising, and those that remain are conserving fuel. Why? Because conflict in the Middle East, thousands of miles away, affects oil production and creates a gulf between the cost of oil and the world price. How does this affect you? Because India imports over 80 percent of its crude oil.
The Middle East has been at the eye of the storm for decades, both because of its massive reserves of oil and the continued instability that spreads out, being the storm that disturbs economies worldwide. The slight adjustment in oil supply owing to regional unrest finds a ready translation into sky-high fuel prices that affect trade and everyday life in the case of India, which mainly depends on imported oil. Such conflicts have a strange knack for converting distant problems into concrete hard dilemmas in front of local markets and economies worldwide.
The Historical Nexus
As the sands of time whisper secrets of a tumultuous past, the history of Middle East tensions unfolds like a rich tapestry, intricately woven with threads of oil, power, and geopolitics. The history of the Middle East can be seen and understood in many ways, however, in this scenario, the focus will be the region’s oil, and oil politics, economics, and power balance – the resources that the area has and which the world needs.
The escalating oil prices reflect the world’s dependence on the Middle Eastern region. The period of 1973 will forever be marked in history due to the oil embargo that brought inflation and a huge surge in oil prices. From then on oil prices continue to be highly volatile to any geopolitical disorder that the Middle Eastern countries tend to experience frequently, and this has the knock-on effect of heightening the perplexity of the clientele that could be expected from the global oil markets. A severe storm characterized the decade following the Iranian revolution, but oil prices increased due to reduced output, and it took years for production to return to pre-revolutionary levels.
Midway through the 1980s when production was at its peak, it was also the peak of the war with the US and Iraq, making it nearly impossible to export. The Gulf War was arguably the turning point in the global oil market where the US once again had to interfere in the Middle East issue. With the commencement of the third geopolitical conflict in the region after a decade of relative peace, conflict further choked the region’s oil reserves and approached the point of no return.
Gulf of Uncertainty
Tensions in the Middle East have now become the epicentre of almost all global market activities, especially with the war between Israel and Iran and that of Russia over Ukraine only adding fuel to the fire, Furthermore, these events have raised oil prices to nine-week highs because this region contains about 30% of the world's oil supply and is now in turmoil. Safe-haven assets are increasing due to the ongoing geopolitical tensions. Since they started, gold has increased more than 8%.
The US is further complicated by the Federal Reserve's unnecessary and inconsistent focus on interest rate increases in the past years, which has pushed bond yields higher and strengthened the dollar. Rising conflict leads to increased demand for gold reserves as a haven. Governments are implementing a strategy to increase their gold reserves to prevent further dispute damage.
History repeats itself as alliances and rivalries in the Middle East create more problems than solutions. They are capable of influencing the economies downwards to recession. The implications of these geopolitical situations do not appeal to investors, anyway.
From Crude to Chaos: The Economic Implications of Middle Eastern Turmoil
Conflicts in oil-rich areas often spill over beyond borders, predominantly disturbing the delicate balance of the world economy. A shutdown of production or blocked oil routes resulted in dramatic surges in fuel prices. This triggers an unpleasant chain reaction: increasing transport prices, rise in inflation, and businesses dependent on reasonably priced fuel find it increasingly hard to maintain their pace. For example, India is among the countries with soaring high oil prices, carrying that cost spectrum in every possible area from food to manufacturing.
For Example, Houthi uprisings in Yemen. The insurgency has always centered on critical oil infrastructure while creating chaos along critical shipping lanes. Striking aromatic and other oil tankers and facilities along the Red Sea have made shipping companies detour along less efficient routes thus significantly and severely ratcheting up the operational costs while crippling international trade severely; it is hardly a logistical problem; it has immense financial impacts because delays and costly transportation have been a cost for both businesses and consumers.
Right at the receiving end of such instability are the Arab countries, especially Saudi Arabia, the UAE, and Egypt. Two of the world's largest oil-producing states, Saudi Arabia and the UAE, are extremely vulnerable to price volatility because it is highly likely to impact their revenues. Having taken note of this vulnerability, these states have also gone hard for diversifying their economies. For example, Vision 2030 attempts to de-oil the Saudi economy by focusing on tourism, technology, and renewable energy. At the same time, the UAE also features diversifications of focus areas rather than finance, trade, or innovation. Such burdened stability is, in Egypt, added over economic growth, while striking a balance between the relatively scarce imported oil and its quite ambitious infrastructure projects. While these efforts bring a glimmer of hope for a more resilient economic future, the road ahead is still intertwined, in part, with the ever-changing dynamics of the oil market.
Financial Aftershocks
With escalating tensions in the Middle East, the global financial markets are on a seesaw, with investors anxiously predicting the next swing. The US stock market has experienced significant fluctuations, with the Dow Jones Industrial Average experiencing significant changes. The Federal Reserve is closely monitoring these events and may reconsider interest rate appreciation.
Stock markets in Asia have also found themselves under siege, with the Japanese Nikkei 225 and the Hong Kong Hang Seng indices suffering considerable losses. The Indian stock exchange, too, which relies heavily on foreign institutional investors (FIIs), has felt the heat, with the Sensex dipping more than 2% in a single day. The depreciation of the Indian rupee has led to increased import costs and further pressure on the current account deficit.
British and German share indices have been under pressure too, with the Financial Times Stock Exchange(FTSE) 100 and Deutscher Aktien Index (DAX) across the channels both taking quite a tumble. Money authority for the eurozone, the European Central Bank has also been looking into the situation, and has suggested that there is no need to raise interest rates for some time now.
The stock exchanges within the region have likewise felt the impact of the tensions in the Middle East. The Dubai Financial Market, which has seen far better days, recorded a drop of more than five per cent in a single day. Abu Dhabi Securities Exchange has also faced a significant pullback. The markets have a high level of foreign direct investment, and the prevailing conflicts have diminished investors' confidence. The local governments work to restore market order and attract foreign investors, yet the situation remains volatile.
In the darkness of geopolitical tensions, crude oil prices dance like dust in the storm, disturbing global economies with the heat of uncertainty, and nations brace for the tremors of conflict that ripple through their markets.
In our interconnected world, distant conflicts affect our daily lives and routines. As we navigate this complex landscape of chaos and wars it is essential to grasp how these global events shape our experiences. Have you truly grasped the profound ways in which these distant struggles echo through the tapestry of our everyday existence, shaping our thoughts, choices, and the very fabric of our lives?
Author: Aditya Kr. Sinha and Soham
Illustration: Cheruvu Sai Kartikeya
Sources
International Energy Agency
BBC
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