It is imperative to have a view, however misplaced it can turn out to be in the future, on how long the latest horrific chapter of the Middle East history can last, who else can be sucked into it and whether there is any hope for a peaceful and prolonged settlement to the belligerence. History suggests that the outlook is ominous.

Imagine if one would, in a light-hearted US comedy, an Israeli counterterrorist agent contemplates leaving the army and his country to try his luck in New York as a hairdresser. His major motive is the absence of any hope of ending the Israeli-Palestine conflict in the foreseeable future. His mother, in her attempt to prevent the son from carrying out his plan, argues that the conflict started 2,000 years ago, therefore it cannot last much longer.

The autocratic Roman Empire displaced the Jewish community from their homeland two millennia ago forcing them to spread out to places such as Iraq, Yemen, Spain, Portugal and Central and Eastern Europe. In the ensuing centuries, Jews had to suffer severe discriminations and pogroms and their attempts in looking for a homeland intensified at the end of the 19th century when the Zionist movement began in earnest. By that time their ancient land was dominated by Arab communities, the recipe for a drawn-out conflict, something that still has not been resolved.

As the ruler of the area, the Ottoman Empire was defeated in WW1, the British were tasked by the international community of establishing a home for Jewish people. Of course, Palestinian Arabs claimed the land as much theirs as the Jewish community. In 1947, after the Nazi massacre of 6 million Jews, the UN voted to split Palestine into a Jewish and an Arab state, something that was accepted by the Jews but rejected by the Arabs. As a result, Jewish leaders unilaterally declared the State of Israel in 1948. After declaring statehood, in the ensuing war with five Arab countries Egypt ended up occupying Gaza and Jordan the West Bank with Jerusalem divided between Israel and Jordan. 

 Israel in 1967 occupied East Jerusalem, the West Bank, the Golan Heights, Gaza, and the Sinai Peninsula. Retaliation was only a question of time, and it took place in 1973 in what is known as the Yom Kippur war. Four years later, after the Camp David Accords, Israel returned the Sinai Peninsula to Egypt. In 1993, as a result of the Oslo peace process Israel recognized the Palestine Liberation Organization, and the Palestinians recognized the State of Israel. The honeymoon did not last. Israel launched a project to settle Jews in Palestine territories.

In the relatively recent past, there have been numerous attempts to revive the peace process. One would have included a two-state solution, but they have never been implemented. Nonetheless, there has been a very fragile status quo over the past 20-30 years and this delicate balance was upended a little over a week ago by the brutal, despicable, and inexcusable attack of the Islamist militant group, Hamas, which rules Gaza and is committed to wiping Israel off the map. (On a side note, the majority of the Palestine people do not support Hamas, quite to the contrary.) The Israeli retaliation was guaranteed and the ground offensive of Gaza, where 1.1 million Palestinians were given 1 day to evacuate, in violation of international humanitarian law, is about to get under way. Water, electricity, and food supply have been cut off, threatening yet another humanitarian catastrophe. This brief summary of one of the most disturbing conflicts of modern times lays bare the implausible: unless Palestine leaders and military groups are willing and ready to recognize the State of Israel, and Israel is willing to withdraw settlers from Palestine territories the status quo will not be re-established.

The sporadic flare ups in tension in the past decades justifiably raised investor’s anxiety level but the latest war episode between Israel and Hamas has brought with it what the CEO of JPMorgan described as ‘the most dangerous time the world has seen in decades’. In this territorial and religious confrontation, Pandora’s box has been re-opened. Economists argue that the escalation of the conflict would hit market confidence and re-vitalize inflationary pressure at the time when central banks have seemed to have been able to mitigate it without pushing the global and regional economies into recession.

According to the IMF, every 10% rise in the price of oil will increase inflation by 0.4%. So far, oil supply from the most salient oil producing region of the world has not been affected but it is worth remembering that the main supporter of Hamas, and Hezbollah, the Lebanese Shiite Muslim political party and militant group, is Iran. The Persian Gulf OPEC member has not been found to be complicit in the Hamas attack on Israel but has warned the Jewish state will bear all the consequences of a ground assault in Gaza. Any proven Iranian involvement will result in a tightening of the sanction screw, which would drive prices considerably higher.

The broader picture is equally grim. The plausible deal of Saudi-Israeli rapprochement brokered by the US, which would have included a potential increase in the Kingdom’s oil production has been iced after last weekend’s horror. Add to that the diminishing Sunni support for the Palestinians and rising tension between the regional Shiite and Sunni powers, which are significant oil producers, cannot be ruled out. The $5/bbl rally at the end of last week was probably the function of shorts covering. All bearish bets were off. Presently, the war does not have a material impact on the oil balance and the upside risk is tentative as demonstrated by yesterday’s price action. (Admittedly, prices were also pressured by the alleged preliminary agreement between the US and Venezuela whereas the former would ease sanctions in case the latter follows through on its promise to sign an election agreement with the oppositions, although any imminent impact on Venezuelan oil supply and exports remains elusive – see yesterday’s note.) An escalation of the crisis into a regional conflict that adversely impacts the regions’ oil supply, however, will unleash the next wave of buying. Judging by the acrimonious rhetoric and the Israeli military retorsion on Hamas and Gaza it is really the question of when and not if. Frightening prospects, alas the hopeful view of the Israeli counterterrorist soldier’s mother looks unsubstantiated after last week’s events.

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