A war between Iran and Israel is back in the news. What could happen to the global economy in the event of a conflict? 4 possible consequences.
A potential war between Israel and Iran would have an immediate global economic impact.
An open conflict between the two powers is now a real possibility with the worsening of the crisis in the Middle East in this fiery start of August. Israel is preparing for an attack from Iran, which has vowed to take revenge for the killing of the political leader of Hamas in Tehran on July 31.
Hezbollah, meanwhile, targeted military bases about 20 km from Israel in a drone attack that also injured civilians, some seriously. The group has yet to react to the killing of one of its high-ranking military commanders in an Israeli attack in Beirut last week.
Finally, just to list the latest tragic events that have occurred in the already dramatic context of the fierce Israeli war in Gaza, several US soldiers were injured in an alleged missile attack that took place on Monday against US and coalition forces at the Al-Asad air base in Iraq.
The climate is very tense. The war in the Middle East may indeed expand, with Israel and Iran on opposite sides and in open conflict. What would be the economic and financial impact at certain points?
1. Oil price jump
The first reaction of an expanded war in the Middle East, with the direct intervention of Iran, could be that of a surge in oil prices.
Black gold has not yet experienced any noteworthy shocks in the face of the mere threat of such a dangerous conflict. Traders are waiting for any next moves. However, assuming an impact on the oil market is appropriate.
It should be remembered that Iran, even if it is no longer the main player in the oil supply that it was in the past, especially for Western countries, still plays its role in the sector. And it could break supply/demand balances.
Tehran is a producer and member of OPEC, but exports most of its crude oil to China due to international sanctions. However, a reduction in Iranian oil exports would have a “massive” impact on the global market, as Beijing would be forced to compete with other countries for supplies. Prices would increase with less raw material, but the same demand.
Iran exports up to 1.5 million barrels per day of crude oil, equivalent to 1.5% of the global oil supply. The country produced a total of 3.25 million barrels per day of crude oil as of March 2024, according to IEA data.
Dramatic episodes can cause the price of oil to skyrocket to as much as 300 dollars a barrel in an instant, energy expert professor Nicolazzi had hypothesized on Ispi (on the occasion of the Iranian drone attacks on Israel in April).
The current situation is very similar. However, the professor recalled, it would not be so convenient for Iran to lose oil sales to China, thus reducing exports as a sign of retaliation against the USA.
2. Trade routes in chaos
A war between Iran and Israel, with the potential involvement of Iraq and Lebanon, would have commercial repercussions on crucial routes, those of the Persian Gulf.
First, tension could grow over the Strait of Hormuz, a narrow waterway at the mouth of the Persian Gulf. This is a major shipping lane that handles nearly 30% of the world’s oil trade, closely monitored for signs of disruption.
An escalation of the conflict between Iran and Israel has raised new concerns. Iran has repeatedly targeted cargo ships passing through the chokepoint over the years and has threatened to block transit in the past. On April 13, before launching a massive missile and drone assault on Israel, Iran, for example, claimed to have seized an Israel-linked container ship near the strait.
“Traffic interruptions or blocks in the Strait of Hormuz would be a game-changer”. According to an observation a few months ago by Richard Bronze, co-founder and analyst of the data firm Energy Aspects, “this is the main or only route for Middle Eastern oil exporters, including members of OPEC Saudi Arabia, Kuwait, and the United Arab Emirates”. There would be consequences.
There would be consequences. These could be mitigated by exporters using longer routes, but the damage to oil prices could be significant and long-lasting. There are not many alternative routes from major production sites to Western countries.
Not only that, Iranian support for Houthi militants in Yemen, which led to attacks on merchant ships late last year, has reduced shipping traffic in the Suez Canal by about 50%, according to the International Monetary Fund. A war scenario could fuel this retaliatory tool. Bottlenecks on trade routes always result in higher prices of goods and raw materials.
It is also necessary to consider the possible increase in freight and insurance costs and to deal with longer journeys by container ships that have to choose new routes.
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3. Inflation rising
With a knock-on effect, rising prices of goods and raw materials have an impact on inflation. Just when central banks have begun to reduce high interest rates and give oxygen to businesses and families, the scenario could change.
The context is not the best if we consider that on Monday 5 August the world stock markets collapsed on fears of a US recession, while the Fed is stalling on lowering the cost of money. Would a hypothetical price surge block central banks’ accommodative policy? The question remains, resulting in an economy weakened by high prices and expensive loans.
4. Earthquake in the markets
A war between powers such as Iran and Israel, in a crucial geopolitical context such as the Middle East, would make the markets more uncertain and fragile.
Gold, the US dollar, the Swiss franc, the yen, and bonds are usually assets that benefit from gains as they are haven assets in dramatic periods such as those dominated by conflicts.
A collapse in stocks would be a negative signal for economic expansion and a general brake on investments as mistrust would dominate.
On the other hand, the US dollar could rise as a safe haven currency and make the euro weaker. Energy imports - and not only - would therefore be more expensive for Europe.
Original article published on Money.it Italy 2024-08-06 16:30:00. Original title: 4 conseguenze economiche della guerra tra Iran e Israele
