• Authored By: Justine Luwedde
09 May 2024

Political tensions have plagued the Middle East for a long time, each with unique consequences in the region and the world in general. The ongoing Israel-Hamas conflict has, however, drawn attention to the region, with substantial implications for the stability of global supply chains.

The Middle East is a major producer of oil accounting for 48.3 percent of the world’s oil reserves. Therefore, any noise in the region could result in energy price fluctuations which in turn affect industries that heavily rely on oil.

Uganda relies on oil imports for energy, just like most developing countries. Probable increases in global oil prices due to the conflict could mean increased costs for fuel and energy, thus affecting major sectors such as agriculture, manufacturing, and transport.

According to the World Bank commodity markets outlook 2023, the conflict in the Middle East may have a limited impact on commodity prices, considering that the current conditions in oil markets differ from supply shocks in the past, and the global economy is better placed to deal with major oil price shocks. For example, conflicts such as attacks on Saudi oil facilities in 2019, and sanctions against Iran, were associated with less acute oil price surges attributed to alternative sources of supply.

The dependence on oil globally has reduced since the 1970s due to a more efficient transport sector, availability of substitutes for oil, and a reduction in the reliance on fossil fuels.

Spikes in oil prices could increase the cost of food, transport, and fertilizers. First, the Middle East is home to various key maritime points, critical for the transportation of goods and oil. The linkage between the Indian Ocean and the Mediterranean Sea, for example, is both a concern for oil markets and agricultural supply chains, as it accommodates the transit of over 50 million tonnes of agricultural products every year.

An escalation of the Israel-Hamas conflict will likely draw in more countries such as Iran and militias such as the Houthis from Yemen, which could further interrupt shipping and supply routes.

For countries afar such as Uganda and other East African partners, disputes in the Middle East will be felt in limited trade as well as the likely spike in the prices of goods and services. In 2022, Uganda registered USD 16m worth of exports to Israel, including fish, coffee, tea mate and spices, and pharmaceuticals, among others. Particularly, coffee and fish rank among Uganda’s top exports. Hence, if the external demand for exports decreases, it will reduce the revenue generated from exports.

Second, prices of fertilizer rise once prices of natural gas and coal increase. The production of nitrogen fertilizer, which is one of the most used fertilizers, along with ammonia, phosphorus, and potash, relies on the use of natural gas as a raw material. Countries dependent on fertilizer imports may experience a decrease in harvests due to predicted high prices and shortages for fertilizer, leading to a reduction in food volumes on the global market.

Any noise in the Middle East has an impact on global supply chains. Illustration/courtesy

The Russia-Ukraine war serves as a good example where fertilizer prices increased due to economic sanctions and interferences in Black Sea trade routes. Uganda has barely recovered from the effect of the Russia-Ukraine war as a net importer of wheat and fertilizers, with imports making up over 96 percent of wheat and 100 percent of fertilizers respectively, in 2022. In 2021, Uganda imported about 40% of wheat and 20% of NPK fertilizer from Russia and Ukraine.

Third, history has shown that shocks to food supply result in inflation and malnutrition. Already, some countries are struggling to mitigate future shocks following the COVID-19 pandemic.

In 2023, the UN FAO reported that the number of people who are food insecure had increased from 624 million in 2017 to 900 million in 2022, globally. Intensification of the Israel-Palestine conflict could widely affect other regions via spillovers. Food exporting countries may increase or reduce their supply to the global market, or worse still, sanctions and trade controls could aggravate global scarcity.

It is also possible that continued tensions in the Middle East may take away global attention from the needs of poor countries, such as shifting critical donor aid flows which means diverting resources away from countries like Uganda.

Therefore, the conflict in the Middle East comes with far-reaching consequences for global supply chains, that range from energy, food, and fertilizer. Amidst the geopolitical uncertainty, the need to diversify supply chains is critical because depending on a sole region for essential resources is a risk to the global economy.

Uganda needs to shift towards diversification and create more flexible supply chains, such as seeking alternative sourcing options and investing in technology to strengthen contingency in global supply chains to limit disruptions.

Featured illustration: SMU

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