Almost every U.S. president inevitably faces a crisis in the Middle East, and President Biden is no exception. The ongoing conflict between Israel and the Palestinian Hamas group, which launched an attack on Israel on October 7th, has the potential to be protracted and intricate.
There are concerns that Iran, a supporter of Hamas with a long-standing desire to see Israel destroyed, may become entangled in the conflict. Israel has declared its intent to carry out a major operation in Gaza, controlled by Hamas, which could lead to months or even years of grueling and brutal urban warfare.
While financial markets are currently shielded from the direct repercussions of this unfolding conflict, as it doesn’t pose an immediate threat to energy supplies, corporate profits, or banking stability, there are still lingering market concerns, particularly if the situation escalates. Here are three key aspects to monitor
Oil Supplies in 2024
Crude oil prices experienced a roughly 4% increase following the Hamas attack, which is a typical reaction as markets factor in a “fear premium” based on the perception of heightened risk. However, this price spike is not substantial and could dissipate if the oil market remains stable.
There are two geopolitical factors that could impact oil supplies in 2024 and consequently affect the U.S. presidential election. Firstly, there were efforts by the Biden administration to broker a groundbreaking deal between Saudi Arabia and Israel, involving the normalization of relations and potential concessions.
In return, the United States would provide defense guarantees to Saudi Arabia, facilitating a deal with Israel. Some experts speculated that part of this arrangement could involve Saudi Arabia increasing its oil production in 2024 to help stabilize U.S. gasoline prices during Biden’s re-election campaign. However, the conflict may now jeopardize this Israeli-Saudi deal and any prospects of increased Saudi oil production in 2024.
Iranian Oil
There have been subtle signs of a thaw in U.S.-Iran relations, including Iran’s recent release of five U.S. hostages in exchange for unfrozen funds. This may have been part of Biden’s strategy to encourage or permit more Iranian oil into global markets to alleviate prices.
Nevertheless, any suspicion of Iranian involvement in aiding Hamas in its attack on Israel could compel Biden to impose stricter sanctions on Iran, halting diplomatic gestures. “Iran’s fingerprints on the attacks could reduce political space for the White House to pursue such leniency,” stated analysts at ClearView Energy Partners.
Impact on U.S. Political Landscape
President Biden has faced challenges related to high inflation and escalating gasoline prices, which reached $5 per gallon in 2022. He is keen on keeping gas prices as low as possible while campaigning for re-election, but the conflict in Israel makes this task more challenging.
Additionally, the Republican party is currently grappling with internal divisions, particularly in the House of Representatives, where former Speaker Kevin McCarthy lost his position on October 3rd due to a vote by far-right members. These divisions may lead to a government shutdown when temporary funding bills expire on November 17th.
However, a significant crisis involving a close U.S. ally, potentially requiring Congressional action, might compel Republicans to unite and resolve their leadership issues. This sense of urgency could mitigate the risk of a November shutdown.
Furthermore, the Israeli conflict could create an opportunity for Congress to approve additional aid for Ukraine. Russia, an ally of Iran, which in turn supports Israel’s enemy Hamas, may face increased political resistance in Congress. Some members may be hesitant to oppose aid to Ukraine, as doing so could indirectly benefit Russia and Iran.
The world appears to be a more precarious place following the unexpected Hamas attacks, disrupting a period of relative calm in the Middle East. With two major wars within America’s sphere of influence and China displaying interest in potentially invading Taiwan, debates over defense spending suddenly seem less prudent.
In conclusion, the ongoing conflict in the Middle East has the potential to reverberate through various aspects of U.S. politics and the global economy, from oil supplies to political unity and international relations. Its long-term implications remain uncertain but warrant close observation in the coming months.
