Global economy is facing the prospect of another profound shock
But experts warned against a hasty sense of reassurance. American and Israeli bombing of Iran and Iran’s region-wide retaliation have set in motion dangers that pose a significant threat to global economic fortunes.
The most alarming fears centered on the possibility that the Iranian government, on the brink of destruction, might retaliate more aggressively, accepting the near certainty of intensified bombing of its territory as the price of fighting the next day. The Iranians will likely seek to undermine the oil and gas producing capacity of regional powers such as Qatar and Saudi Arabia.
USA Israel Attack on Iran news: Follow ET’s war news live; click to continue Any event that prolongs the conflict or threatens oil and gas supplies is likely to increase energy prices to levels that will increase inflation. This could cause central banks around the world to raise interest rates, increasing the cost of mortgages, car loans and other borrowings. This will disrupt consumer spending and business investment; This is a classic path to crisis.
“We are going through very unstable times,” said Kenneth S. Rogoff, former chief economist of the International Monetary Fund and a professor at Harvard University.
Rogoff, a chess grandmaster and student of history, was skeptical of the consensus that the conflict would be short-lived. He referred to the murder of the presumptive heir to the throne of the Austro-Hungarian Empire more than a century ago; This was an event that started a global conflagration.
“This is like asking what the macroeconomic consequences would be if Archduke Ferdinand was killed and having no idea what would happen next,” Rogoff said. “When World War I started, everyone thought it would be over within a month.” Currently, the center of concern is the fate of the energy produced in the Middle East, which accounts for 30 percent of the world’s oil and 17 percent of natural gas. Any interruption in this flow would almost certainly cause problems in the world’s largest importing countries, namely the major economies in East Asia and Europe.
Whenever the world encounters new reasons to worry about access to Middle Eastern oil, comparisons turn back to the 1970s, when the Organization of Petroleum Exporting Countries delivered a series of shocks. As the oil cartel cut off supply to raise prices, Americans were forced to endure a previously unthinkable humiliation: waiting in long lines outside gas pumps for rationed sales and paying record prices to keep their massive sedans on the road.
Then, as now, attention was focused on the Strait of Hormuz, the narrow waterway bordering Iran and a sea route between the Persian Gulf and the Indian Ocean. Roughly one-fifth of the world’s oil supply passes through this canal, and most of it goes to Asia.
The pressure on passage through the Bosphorus was especially intense in 1979; That year, the American-backed Shah of Iran was overthrown in a revolution that brought to power the extremist government that has ruled ever since.
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But here historical parallels diverge. The cartel, now known as OPEC+, has vowed to increase production to compensate for stocks endangered by the war. The world’s oil supply generally exceeds demand, thanks in part to rapid increases in American production.
The oil shocks of the 1970s and the ensuing Persian Gulf conflict led many countries to seek greater energy self-sufficiency. Recognition that oil and gas entails persistent geopolitical risks (not to mention climate change) has also led to a shift from fossil fuels to renewable energy sources. China and Europe have led the way by investing heavily in wind and solar energy.
But the current crisis underscores the persistent truth that the world is heavily dependent on fossil fuels. If passage through the Strait of Hormuz is blocked for more than a few weeks and Iranian missiles damage refineries, this will outweigh any immediate gains from cleaner power sources.
And if refineries are shut down, this will eventually limit the production of petrochemical products, including fertilizer. This could increase the cost of growing food and threaten malnutrition in sub-Saharan Africa and South Asia.
“Oil and gas are still extremely important,” said Kjersti Haugland, chief economist at DNB Carnegie, a Scandinavian investment bank based in Oslo. Whatever the benefits of transitioning to green energy, “there’s still a long way to go,” he added.
Oil prices rose more than 10% on Monday; This is a clear expression of concerns about access to global energy resources. However, later in the day, prices dropped; It was clear that concerns were limited to the ability to export oil and gas from the Middle East.
Major exporters of factory goods China, Japan, Germany, South Korea, Taiwan, Italy and Spain are currently struggling with President Donald Trump’s trade war. They are dealing with tariffs and rising costs on raw materials such as steel. Now they are looking at the possibility that fuel prices may increase if the war in the Middle East does not quickly turn into diplomacy.
“The most vulnerable regions of the world are Europe and East Asia because of their dependence on imported energy,” said Adnan Mazarei, a senior fellow at the Peterson Institute for International Economics in Washington.
A glimpse of the risk emerged on Monday, as Qatar’s state-owned oil company announced it was halting production of liquefied natural gas, given the dangers of transporting its goods through the Strait of Hormuz. This caused the price of natural gas in Europe to increase by 50%.
China appears particularly sensitive, given its dependence on Iran for more than 13% of its oil imports. The Chinese government is already struggling with a catastrophic drop in property prices that has decimated the savings of millions of households.
India faces unique challenges. The Indian government promised Trump last month that it would reduce oil purchases from Russia as a way to avoid American tariffs. It has tried to make up the difference by importing more oil from Persian Gulf suppliers such as Saudi Arabia and the United Arab Emirates. Now war threatens these materials as well.
India’s economy also relies on remittances, the money sent home by migrant workers working in the construction, retail and hospitality sectors. Nearly 9 million Indian migrant workers are in the Persian Gulf, contributing to 38% of all remittances, according to an analysis by Shumita Deveshwar of TS Lombard.
The United States may appear more isolated given its status as the world’s largest producer of crude oil and largest exporter of liquefied natural gas. But as American fossil fuel companies stand to profit from a prolonged rise in oil and gas prices, American consumers are almost certain to pay more for gasoline. Fuel prices filter through the rest of the economy, causing prices to rise.
It’s a fact that has led many experts to assume that Trump will try to end the conflict before higher energy prices have a chance to fuel the rising costs of consumer goods.
He owes his mandate in part to public unhappiness with food prices. Entering the November congressional elections in an environment of rising gas prices could be politically dangerous.
But Harvard economist Rogoff said that in the long run, the effects of the resulting conflict will tend to increase inflation. The United States will need to replenish its weapons stockpile, which will increase the national debt.
“We’re going to have to spend a lot more on the military, and that will have implications for interest rates and inflation,” Rogoff said. “Baked in this cake.”
This article was first published in The New York Times.
