There are obvious supply-chain impacts from war. Shortages, escalating prices, and the flow of goods are common short and long-term examples. The ongoing conflict between Russia and Ukraine and the more recent bloodshed between Hamas and Israel are certainly exhibiting the supply-chain impact mentioned. Still, there are more subtle effects as well.
The Russia/Ukraine War
When it first started on February 24, 2022, it seemed likely that Ukraine would not be able to fend off Russia and the war would be over soon. The conflict, however, is ongoing, and there have been many supply-chain challenges as a result. The war created product shortages, impacted the flow of goods, caused inflationary cost increases, especially in the energy-intensive logistics segment, and is creating critical food shortages globally.
Natural gas prices in Europe increased by approximately 130% during the first six months of the war alone, and coal increased by nearly 100%. The EU alone previously imported 35% of its natural gas, 20% of oil, and 40% of coal from Russia before the war. But it isn’t just the rising costs that are challenging; it’s also availability.
What might be less obvious are the increased freight costs, container shortages, port closures, severe shipment delays, and disappearing warehousing space. The war also shut down the availability of critical metals that the U.S. imported from Russia, including platinum, titanium, and nickel, dramatically affecting the production of automotive batteries, electronics, and industrial products.
While the impact on supply chains has undoubtedly been painful, there may be a few positive results as well. Major companies are identifying alternative supply chains and reshoring operations closer to home based on the impact of the war, as well as attempts to distance themselves from China. Strategic alliances are in the works with such countries as Africa and Australia.
The Israel-Hamas War
In just a month since its inception, the Israel-Hamas war is already threatening the global supply chain, especially in energy, technology, pharmaceuticals, agriculture, logistics, and commodities. Because the conflict is new, there is ongoing speculation as to what might happen in the region, but here are some of the potential problems:
Oil prices may stay high as the impact on supply chains is gauged. While Israel produces very little oil, if Iran enters the war and sanctions on Iranian oil are reinforced, prices will rise. If there’s a direct conflict between Israel and Iran, oil price projections are as high as $150 a barrel, down 1.7%, and a devastating recession.
Israel has a wealth of technology startups, several with research and production facilities in the region. The war could cause delays in product launches and supply chain bottlenecks. Microchip manufacturing will likely be affected by the conflict; chip manufacturers like Intel and Nvidia rely on industry experts and production facilities in the area. Additionally, businesses are boarding up for security reasons and lack of employees as reservists are called upon en masse.
There will also be significant disruptions in transportation and logistics as ports, roads, and airspace challenges make it difficult to move goods. The Middle East has the world’s busiest shipping routes, including the Suez Canal, the Red Sea, the Persian Gulf, and the Strait of Hormuz, and escalation will have a dramatic impact.
Other Subtle Impacts of War
There are two more subtle potential impacts of war in the Middle East and Ukraine. In the first case, affecting the Middle East alone is the fact that Iran, Turkey, and Egypt are the only regional countries with substantial water resources. The other 2/3 of the region uses water from sources outside their borders. The Jordan River accounts for 75% of Jordan’s water and 60% of Israel’s. Sixty years ago, Arab countries attempted to divert Jordan’s headwaters away from Israel towards Jordan. One of the reasons for the Arab-Israeli Six-Day War was to stop the attempt. While oil is of critical importance in the region and globally, control of water is likely on par with the Israelis. As more countries choose which side to support, water may become an issue for Israel.
The second impact is a potential challenge of both wars. Over the past several decades, globalization has grown. However, in the past 15 years, it began to weaken, and countries are becoming more protectionist. This deglobalization continues to weaken the connection between the world’s largest economies. In a recent report, Wells Fargo economists claimed that Israel’s declaration of war may continue that trend.
It’s not just about playing or not playing nice. Deglobalization leads to reduced cooperation between countries on every level. There’s less information and technology sharing and an impacted economic environment. Competition wanes, prices rise, inflation strengthens, and monetary policies globally tighten.
Will all these things happen with these two wars? Probably not. But the potential for serious supply-chain impact certainly exists.