When inflation appeared to be under control and Western economies were heading toward an uneventful year marked by weak but positive growth, the conflict in the Middle East has disrupted the outlook.
However, one certainty remains: the longer the conflict lasts, the greater the impact on our economies and financial markets.
Unsurprisingly, hydrocarbon prices have reacted the most. From around USD 60 per barrel, Brent quickly surged to peaks above USD 85.
The Amsterdam-traded natural gas contract (TTF) doubled within days, rising from USD 30 to more than USD 60 before easing back toward USD 50. Around 20% of global oil production transits through the Strait of Hormuz, currently closed to navigation by Iran.
Lesser impact than 50 years ago
Today's situation differs significantly from the 1970s, when the global economy was far more dependent on oil, or even from the context of the first Gulf War.
The energy transition has diversified supply sources, while the boom in US shale oil and gas has made the United States the world's largest producer of hydrocarbons.
As the world's largest economy, it is no longer dependent on Gulf producers for its energy supply, and Europe has also diversified its sources.
Two additional factors help explain why the feared USD 100 per barrel scenario has not materialised. Oil production continues to expand, with new players such as Guyana emerging and others, including Brazil, Canada and Libya, increasing output. In case of necessity, Washington could also support higher Venezuelan production, now under US authority.
At the same time, Western economies have become less energy-intensive as services have gained prominence relative to industry.
A more delicate situation for gas
The gas market remains more sensitive. While the United States is the largest global producer, Russia, Iran and Qatar are also major suppliers. With Russia and Iran under sanctions, alternatives to Qatari gas remain limited. For now, Europe is largely excluded from the gas supply of these three countries.
Instead, Europe relies primarily on Norway and the United States, while competing with Asia for access to the remainder of global production. As gas markets are global, sustained price increases would inevitably affect our economies, particularly if the situation persists.
In this context, Europe, Japan, and South Korea appear to be the most exposed economies. All three are energy-poor and could see their energy bills rise sharply. With storage reserves currently below 30% of capacity (compared with an average of 45%), a rapid end to the conflict would be necessary for Europe to rebuild stocks ahead of the next winter.
Purchasing power under pressure
These developments have significant implications for household purchasing power and the competitiveness of industrial sectors.
The conflict also creates a broader chain reaction. One third of global fertiliser production transits through the Strait of Hormuz, and demand from the agricultural sector rises in the spring. Fertiliser prices are increasing, and agricultural commodity prices are likely to follow.
At the same time, maritime transport costs continue to climb. Given the heightened risks, insurers are demanding higher premiums for ships and cargo. These costs will inevitably be passed on, at least partially, to the final consumer.
Domino effect is a possibility
If the conflict proves prolonged, the risk of a renewed inflationary shock becomes tangible.
From the price of bread to airline tickets, higher energy costs would affect a wide range of goods and services. For central banks, this resurgence of inflation risk comes at an inconvenient time. The Federal Reserve is still considering interest-rate cuts, while the ECB intends to maintain its current rates and would welcome inflation stabilising within its target range.
The conflict changes this outlook. As seen roughly five years ago, the debate may shift toward whether inflation will prove temporary or risk becoming entrenched. Given the uncertainty surrounding the conflict's objectives, it remains difficult to assess.
A conflict with multiple implications
In this context, the prospect of cheaper credit is receding. Under current conditions, this is not positive for economic momentum. Investment in artificial intelligence, particularly in data centres, has been one of the main drivers of the US economy in recent quarters. Higher borrowing costs, combined with rising energy prices, pose a challenge for this highly energy-intensive sector.
Market nervousness is already visible. The Seoul stock exchange, closely linked to major technology companies, fell by 12% in a single session before rebounding by 10% the following day. Higher energy costs are also reflected in cryptocurrency markets, as mining becomes more expensive.
Europe, which has gradually benefited from investor caution toward the uncertainty generated in Washington, may face renewed pressure. Investors are expecting significant stimulus from Berlin to support Germany and, by extension, Europe as a whole. Under the current circumstances, however, it remains difficult to see how the private sector would accompany this public investment. The prospect of a stronger European recovery may therefore take longer to materialise.
Europe, Japan and South Korea are more vulnerable
At this stage, the United States remains energy self-sufficient, an advantage reinforced by its influence over Venezuelan production. As the world's largest hydrocarbon producer, it could also benefit from higher energy prices. US equities, therefore, remain part of our portfolios.
A similar dynamic applies to Brazil, where hydrocarbon production continues to expand. Elsewhere, China, India and other emerging economies are likely to rely on Russian hydrocarbon supplies and should retain a degree of competitiveness. However, a stronger US dollar and rising energy prices remain negative factors.
Europe, Japan, and South Korea appear to be the most exposed large economies in the event of a prolonged conflict. We remain cautious toward the two Asian economies. Within the euro area, we prefer exposure through individual equities. See our recommended investment portfolio below:
