Global financial markets are currently downplaying the risk of a “massive conflict” in the Middle East, according to economist and New York University professor Nouriel Roubini. In an interview with Bloomberg, Roubini noted that investors seem to believe that Israel “has no choice but go into Gaza and get rid of Hamas,” and they are pricing in a scenario in which the conflict remains contained even if Israel occupies Gaza. However, Roubini warns that there is a downside scenario in which Iran and Lebanon also get involved, leading to a larger conflict between Israel and Iran.
Roubini explains that if Israel attempts to destroy Hamas, Iran, a major backer of Hamas, could unleash Hezbollah in Lebanon, creating a second front. This could potentially lead to a third front in the West Bank. In such a situation, Israel may feel compelled to attack Iran. This would have significant consequences, including the disruption of oil supply from the Gulf region.
According to Roubini, a spike in oil prices would result from this conflict escalation, which would have a huge economic impact. While he acknowledges that this is not the baseline scenario, he argues that it is still a risk that should not be ignored. If oil prices surge, it would create a stagflationary shock and present a huge dilemma for central banks.
The recent hostilities between Israel and armed Palestinian groups have already caused a jump in oil prices, with the international Brent benchmark hovering around $86 per barrel and US West Texas Intermediate crude trading around $83 per barrel. Investors should keep a close eye on the situation as any further escalation could have severe economic consequences.
The latest round of conflict began when armed Palestinian groups launched a surprise attack on multiple locations along the Gaza border, prompting a counteroffensive from Israel. These hostilities threaten the stability of the Middle East and have already caused market volatility.
As the situation unfolds, it is important for investors and market participants to carefully assess the risks associated with a potential escalation in the Middle East. The impact on oil prices and the broader economy cannot be understated. Central banks will be faced with difficult decisions on how to address the economic fallout of such a conflict.
In conclusion, while markets may currently be underestimating the risk of a “massive conflict” in the Middle East, economists like Nouriel Roubini are sounding the alarm. The potential involvement of Iran and Lebanon in a conflict between Israel and Hamas could have significant implications for the global economy, particularly oil prices. Investors and central banks should closely monitor developments and prepare for the potential economic impact of a further escalation.