US, Israel's war with Iran threatens global economy with fresh energy shock

In the most hopeful scenario for the global economy, the latest war in the West Asia ends within a few weeks. 

 

The region continues to produce oil and gas. Shipping resumes in the Strait of Hormuz, preventing a shock to the world’s energy supplies. Fear of inflation subsides. But experts cautioned against any hasty sense of reassurance. 

 

The American and Israeli bombing of Iran, and Iranian reprisals throughout the region, set dangers in motion that pose a substan- tial threat to global economic fortunes. The most alarming fears centered on the possibility that the Iranian government — pushed to the brink of elimination — might unleash more aggressive retaliation.

 

The Iranians would presumably seek to damage the capacity to produce oil and gas in regional powers like Qatar and Saudi Arabia. Any event that extends the conflict or threatens sources of oil and gas is likely to lift energy prices to levels that would sow inflation. 

 

That could prompt central banks worldwide to raise interest rates, pushing up the costs of mortgages, car loans and other borrowing. And that would choke off consumer spending and business investment — a classic pathway to a downturn. “We’re in a very precarious period,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund and a professor at Harvard. At the center of concern for the moment is the fate of energy produced in the Middle East, source of 30 per cent of the world’s oil and 17 per cent of its natural gas.

 

Any disruption to that flow would almost certainly trigger trouble in the world’s largest importing nations — major economies in East Asia and Europe. 

 

Whenever the world confronts fresh reasons to worry about access to Middle Eastern oil, comparisons turn to the 1970s, when the Organization of the Petroleum Exporting Countries delivered a series of shocks. Now, attention focused on the Strait of Hormuz, the narrow waterway that borders Iran and is a maritime conduit between the Persian Gulf and the Indian Ocean. Roughly one-fifth of the world’s oil supply passes through the channel, much of it destined for Asia. 

 

The crisis at hand underscores the stubborn reality that the world remains heavily dependent on fossil fuels. If pas- sage through the Strait of Hormuz is impeded for more than a few weeks, and if Iranian missiles damage refineries, that will outweigh any immediate gains from cleaner sources of power. And if refineries are taken out, that will eventually limit production of petrochemical products, including fertilisers. That could increase the cost of growing food, threatening malnutrition in sub- Saharan Africa and South Asia. 

 

China, Japan, Germany, South Korea, Taiwan, Italy and Spain — all significant exporters of factory goods — are already contending with the trade war pursued by US President Trump. 

 

They are navigating tariffs and increased costs for raw materials like steel. Now, they are staring at the possibility that the price of fuel might soar as well, if the war in the West Asia does not quickly yield to diplomacy. 

 

A sense of the stakes emerged on Monday when Qatar’s state-owned oil company announced that it was shutting down production of liquefied natural gas, given the dangers of transporting its wares through the Strait of Hormuz. That sent the price of natural gas in Europe soaring by 50 percent. China appears especially susceptible, given its reliance on Iran for more than 13 percent of its oil imports. 

 

The United States may appear more insulated, given its status as the world’s largest producer of crude oil and biggest exporter of liquefied natural gas. But while American fossil fuel companies are poised to profit from an extended increase in the price of oil and gas, American consumers would almost certainly wind up paying more for gasoline. 

 

The price of fuel filters through the rest of the economy, nudging prices higher. This is the reality that prompts many experts to assume that Trump will seek to end the conflict before higher energy prices have a chance to exacerbate rising costs for consumer goods. Yet, longer term, the impacts of the unfolding conflict will tend to increase inflation, Rogoff, the Harvard economist, said. The United States will need to replenish its stock of weapons, adding to the national debt.