Israel-Hamas War: what is the impact on Brazil’s economy? – 10/25/2023 – Market

Fifty years ago, during the Yom Kippur War, clashes between Arabs and Israelis were behind a commodity market shock that shook the global economy for years. This time, after the Hamas terrorist attack on Israel, the expectation among analysts is that there will not be such an extreme scenario, and one of the differences is precisely the advancement of new exporters in the market, including Brazil.

Even so, analysts estimate that the continuation or even escalation of the conflict could have an effect on consumers’ pockets.

The biggest fears are that the war will evolve and involve new actors in the region, especially Iran. So far, the conflicts mainly involve the Israeli military and the Palestinian terrorist group Hamas, which controls the Gaza Strip.

Both Israel and the Gaza Strip are less relevant to the global oil market, which is not the case with Iran.

Iranian authorities have made a series of statements against Israeli actions in the war, and groups supported and financed by the regime in Tehran, such as the Lebanese Hezbollah and the Houthis in Yemen, have moved in recent days.

Leaders from the United States, European Union and United Kingdom have warned in recent days about a possible escalation of the conflict. The US has increased its military presence in the Middle East.

If Iran enters the confrontation, in addition to a possible reduction in the country’s oil exports, there are fears for the effects on the transportation of the commodity through the Strait of Hormuz, through which around 30% of the product consumed in the world passes.

“Long war” in Gaza

“The current conflict does not directly involve key countries in the production or consumption of crude oil”, summarizes analyst Raphael Faucz, from Rystad Energy. “So far, the main impact on prices comes from the risk premium associated with a possible worsening of the conflict and potential impacts on more relevant countries, such as Iran,” he says.

But even a scenario of continued conflict, without escalation, could have an impact on the price of oil, and, consequently, on fuel prices and inflation around the world. In recent days, a number of Israeli officials have warned of a “long war” in Gaza that could stretch into the coming months.

“Given this, we foresee a tighter oil market than initially anticipated, sustaining prices around US$90 per barrel in the coming quarters”, says Faucz.

The president of the IBP (Brazilian Petroleum Institute), Roberto Ardenghy, also estimates that, if the conflict stabilizes, a barrel of oil will cost between US$80 and US$90 by the end of the year. In this scenario, with an increase in prices compared to a few months ago, Ardenghy assesses that gasoline and diesel could be affected in Brazil, especially as the country depends on imports of the two derivatives.

Impact on inflation and interest

Macroeconomics professor Ricardo Hammoud, from Ibmec-SP, says that the possible increase in the price of oil on the international market could increase inflation in Brazil. The commodity is one of the products with the greatest inflationary impact, since the production chain uses fuel as a raw material for transportation, and, in some cases, also for production.

With a possible “jump” in prices, “the slowdown in inflation in recent months could stop. It’s something we’ve seen happen other times”, says Hammoud.

The professor recalls that the Central Bank is in the process of reducing interest rates and believes that, if the rise in oil prices is stronger, the monetary authority may even have to interrupt this process.

Furthermore, Hammoud assesses that, in cases of higher commodity prices, the so-called international parity pricing policy, adopted in Brazil, could undergo a change.

This is something that could happen if the government realizes that the price of oil on the international market has increased a lot, he assesses.

In his view, Petrobras will be able to hold down gasoline prices in Brazil, without passing on the increase to consumers, thus not maintaining parity. “The company’s directors could claim that the increase is temporary, creating a problem for Petrobras”, he concludes.

Different scenario from 1973

As part of the Yom Kippur War, the Arab countries, which dominated OPEC (Organization of Petroleum Exporting Countries), opted for a boycott of exports of the commodity as a way of putting pressure on Israel’s allies.

At that time, in three months, a barrel of oil jumped from US$2.90 to US$11.95. The impacts on the global economy were very strong and were behind the so-called “stagflation”, a period of high inflation with stagnation, which dominated much of the world in the following years.

Since then, there has been a drop in OPEC’s participation in global oil production and an increase in the participation of countries outside the group, such as the United States and Brazil.

“Although OPEC has strengthened its relevance recently, especially with OPEC+, which includes Russia, the current dependence on exports from this group is lower than in the 1970s”, points out Faucz.

In 2016, the group, made up of 13 countries, expanded with nine more nations, notably Russia, in what is known as OPEC+. The organization holds periodic meetings to determine the oil production of its members, being able to cut or increase it according to their interests.

Ardenghy recalls that the national scenario has also changed intensely since the shock of 1973. At that time, Brazil imported around 90% of its oil consumption and had a “brutal dependence” on abroad.

Today the situation is reversed, with even a surplus, exporting more oil than it imports. In recent years, the commodity has been the second largest source of income from abroad for Brazil, behind only soybeans.

Furthermore, Faucz recalls that, regarding trade flows, currently the majority of exports from OPEC members, especially from the Middle East, are destined for Asia, mainly China and India. In this context, countries like the United States, which have become the largest oil producers in the world, are less susceptible to action by the group.

Opportunities for Brazil

Ardenghy says she is optimistic about Brazil, and assesses that the country’s non-involvement in conflicts that threaten other important oil producers, such as Middle Eastern nations and Russia, reinforces the national attractiveness.

“Brazil is one of the countries that is expected to increase its exports the most in the coming years and has all the conditions to be a more relevant player. It is naturally a country that attracts investment attention, and stability is part of that”, he assesses.

In Faucz’s view, the Brazilian offer offers a reliable option for medium and long-term contracts, far from the instability of American exploration methods, and with Brazil being oblivious to geopolitical contingencies and OPEC quotas.

The techniques used by the United States for exploration are constantly criticized for their potential negative environmental impacts. The so-called fracking technology used to explore gas and oil in the country has already been banned in some nations, such as the United Kingdom.

Brazil’s oil production, which broke a record of around 4.3 million barrels per day in 2023, is expected to surpass the 5 million mark in the next decade, according to the analysts consulted.