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Economy Could Be Impacted by Escalation of Israel-Hamas War

Hungary Today 2023.10.17.

The Hungarian economy will feel the immediate impact of the Israeli-Palestinian conflict if it does not stop at the borders. Falling fuel prices and rising inflation are also at stake if the current conflict escalates into an armed confrontation between the Jewish state and Arab countries. In a strange twist of fate, it was exactly 50 years ago, on October 17, 1973, that the oil crisis erupted and the whole world economy was shaken, writes Világgazdaság.

The Israel-Hamas war came at the worst time for the Hungarian economy, which had just recovered from the scars of the energy shocks and now faces the same challenges again. At this time last year, gas prices set new records, and then, combined with the rise in electricity prices, threw the country’s economy off balance, causing the Hungarian forint to weaken last autumn.

Now, however, the picture is certainly changing, in that policymakers’ attention may turn to oil price changes rather than gas prices.

One of the Middle East’s main sources of raw materials will certainly not be able to detach itself from the events of the coming weeks, and the price of oil could immediately soar above USD 100 as the war escalates, with neighboring countries getting involved, and this could be reflected in domestic fuel prices and inflation.

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As Világgazdaság warns, given the historical background, the fears are well founded. Exactly 50 years before the armed conflict that has now erupted, after the 1973 Yom Kippur War, the Arab countries of OPEC (Organization of the Petroleum Exporting Countries) announced that they would not send oil to countries allied with Israel. At the same time, the price of oil drastically increased, triggering the biggest oil crisis of the 20th century. The question is whether these events will be repeated.

At the moment, we do not know whether we are moving towards a more severe crisis or a crisis that will be resolved quickly, but what is certain is that as long as oil market players are not widely affected and this conflict remains at the current level, there is no reason to expect a similarly severe oil crisis,”

said Péter Virovácz, senior analyst at ING Bank.

As the analyst noted, there will be some risk premium in the market that may be reflected in domestic fuel prices, but he does not expect a drastic change in principle.

While there are some extreme scenarios, the reality of these is tempered by the artificially tight supply on the oil market, with oil producers deliberately holding back production to keep oil prices around USD 90, the expert said. He explained that the moment the price bounces as a result of the conflict and demand falls, producers would be forced to act again.

A hundred dollars is the threshold at which demand for oil would fall sharply, and that would damage the financial and economic interests of oil producers,”

the analyst emphasized.

Even if he does not expect an event similar to the oil crisis, he believes that a possible strengthening of the dollar could lead to Hungarian inflation next year being 1-1.5 percentage points higher than expected.

Analyst Dávid Németh, head of K&H Bank, also believes that if the current conflict does not worsen, there will be no spectacular rise in oil prices. The economist believes that

in the event of a more violent escalation, the price of oil could go up to USD 140-150, so even if the price of fuel in Hungary does not reach HUF 1,000, it could easily reach HUF 700-800.

The increase in price could be caused not only by the movement of oil prices, but also by the forint-dollar exchange rate, as in such a situation the U.S. currency would be a safe haven currency, putting the forint under pressure again. Such a scenario could increase inflation by one to 1.5 percentage points. However, such a high price, if it proved to be permanent, would certainly put a brake on the world economy. Asked whether there could be a repeat of the oil crisis of 1973, he said that in the baseline scenario, no, but that it could not be completely ruled out in the Middle East.

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Via Világgazdaság, Featured image: Pixabay

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