Conflicts rarely remain confined to their geographic borders. Their economic consequences often travel far beyond the battlefield, influencing trade flows, financial markets, and strategic industries.

The October 2023 Israel-Hamas conflict illustrates this reality. While the confrontation began within a localized region, its ripple effects quickly spread across neighboring economies. Shipping insurance premiums for vessels crossing the region rose sharply, increasing from 0.7 percent to nearly 2 percent. At the same time, disruptions to regional gas supply chains began affecting countries dependent on stable energy flows.

For frontier economies such as Egypt and Jordan, these disruptions carry particular weight. Both countries are deeply integrated into the regional energy landscape, yet they play very different roles within it. Egypt operates as a regional energy hub and exporter, while Jordan relies heavily on imported energy.

This contrast provides a valuable lens for understanding how geopolitical instability influences energy markets and financial systems in neighboring economies.

Egypt and Jordan: Two Sides of the Energy Equation

Geographic proximity to a conflict zone creates transmission channels that differ from those seen during global crises. While distant markets typically experience spillovers through financial networks, neighboring countries often face direct disruptions linked to regional infrastructure and supply routes.

Egypt occupies a central position in the regional energy ecosystem. The country accounts for roughly 1.6 percent of global liquefied natural gas trade and operates two major LNG export terminals in Damietta and Idku. Together, these facilities exported approximately 8.9 billion cubic meters of LNG, largely to Europe and Turkey. These exports represent about 5 percent of Europe’s gas consumption and nearly a quarter of Africa’s.

Jordan’s situation is very different. The country depends heavily on imported energy. Around 80 percent of its electricity supply comes from external sources, and in 2023 Jordan imported more than 4 billion cubic meters of natural gas while producing only a small fraction domestically. Much of this supply is linked to regional partners, including Israel and Egypt.

This structural contrast creates a natural experiment. Egypt reflects the supply side of the regional energy system, while Jordan represents the demand side. Together, they offer insight into how energy markets respond when geopolitical tensions escalate.

Frontier Markets and Structural Vulnerability

Energy markets in frontier economies differ significantly from those in advanced financial systems. These markets often operate with limited financial depth, fewer hedging instruments, and less developed trading infrastructure.

Such structural characteristics can amplify the impact of external shocks.

In the case of the Israel-Hamas conflict, these vulnerabilities became particularly visible. The disruption occurred in a region where alternative energy supply routes are limited and market mechanisms for absorbing shocks are less developed. As a result, volatility within the energy sector intensified.

Unlike earlier global shocks such as the COVID-19 pandemic or the Russia-Ukraine war, the Israel-Hamas conflict produced a more concentrated regional impact. The limited availability of alternative supply routes in frontier markets meant that localized disruptions translated into pronounced market volatility.

Measuring the Impact on Energy Firms

To understand how conflict intensity affects energy markets, researchers analyzed daily firm-level data from energy companies operating in Egypt and Jordan. The analysis combined market value data from financial databases with conflict intensity indicators, including daily casualties and injuries.

By aligning these datasets over time, the study created a detailed picture of how conflict events corresponded with fluctuations in the market value of energy firms.

The results reveal a clear pattern of volatility clustering during the conflict period. As hostilities intensified, the market value of energy companies experienced pronounced fluctuations, highlighting the sensitivity of frontier energy markets to geopolitical developments.

These dynamics suggest that regional conflicts can produce financial disruptions comparable to those observed during major global crises.

Why Conflict Escalation Matters More Than De-escalation

One of the most striking findings is the asymmetric response of energy markets to conflict developments.

Markets react far more strongly to escalation than to de-escalation. In practical terms, this means that rising conflict intensity triggers sharp increases in volatility, while reductions in hostilities generate more modest market stabilization.

This asymmetry reflects the way investors process risk during periods of geopolitical tension. Escalation introduces uncertainty about supply disruptions, infrastructure damage, and future policy responses. These concerns rapidly influence investor sentiment and market valuations.

By contrast, periods of de-escalation do not immediately eliminate risk perceptions. Investors remain cautious until stability appears durable.

For energy markets, this dynamic translates into pronounced spikes in volatility whenever geopolitical tensions intensify.

Supply Chains at the Center of the Shock

Energy security plays a central role in understanding these market responses.

The energy supply chain spans multiple stages, from extraction and production to transportation and distribution. Disruptions at any point in this chain can quickly influence energy availability and pricing.

Geopolitical conflicts are particularly disruptive because they can affect both physical infrastructure and investor expectations simultaneously. Supply routes may be threatened, insurance costs for shipping may rise, and political uncertainty may delay investment decisions.

In frontier markets, where infrastructure and diversification options are more limited, these disruptions can have amplified consequences.

The evidence suggests that regional conflicts can significantly disrupt energy supply chains and create sustained volatility within energy markets.

Market Behavior During Extreme Events

Another important insight from the research is the presence of strong tail dependence in energy markets during conflict periods.

In financial terms, tail dependence refers to the likelihood that extreme events occur simultaneously across related variables. In this case, severe conflict escalation is closely linked with extreme movements in the market value of energy companies.

The analysis shows that the probability of extreme market fluctuations increases significantly during periods of heightened conflict intensity. This pattern highlights how geopolitical events can trigger disproportionate market reactions.

For investors and policymakers, these dynamics underscore the importance of incorporating geopolitical risk into financial modeling and risk management strategies.

Policy Lessons for Energy Security

The findings carry important implications for energy policy and economic resilience.

First, geographic proximity to conflict zones remains a critical factor in determining economic vulnerability. Neighboring countries often face direct spillovers that differ from those experienced by distant markets.

Second, frontier economies may need to strengthen their energy security strategies. Diversifying energy supply routes and expanding infrastructure capacity can help reduce exposure to regional disruptions.

Third, financial models that assume normal market conditions may underestimate the risks associated with geopolitical conflicts. Accounting for extreme events and asymmetric market responses can provide a more accurate understanding of potential vulnerabilities.

In regions where geopolitical tensions remain a recurring reality, building resilience across energy systems and financial markets is no longer optional. It is essential for economic stability.

This article was inspired by research by Mina Sami and Wael Abdallah, titled “Panel GARCH-Copula Modeling: Evidence From Energy Market Response in Egypt and Jordan to the October 2023 Israel-Hamas Conflict,” published in Conflict Resolution Quarterly (2026).