What has happened in the war on Iran?
The US-Israeli war over Iran, and Iran’s military response – and the de facto closure of the vital Strait of Hormuz – have roiled financial markets around the world. war has sent oil and gas prices Stocks rose and fell (unless you’re a big oil company; Shell hit record highs) and shook up future growth expectations (below), inflation (above) and interest rates (Above). In Britain, consumers saw a surge in fuel prices Mortgage lenders are scrambling Whereas, to pull fixed rate offers wholesale gas prices The two-thirds increase will soon add up to higher household bills. Even if the conflict remains relatively contained, it is already bad news for the global economy and will affect different regions in different ways, with net energy importers (such as the UK and Europe and most of Asia) suffering greater losses than net exporters (such as the US).
Why is the Strait of Hormuz so important?
The Persian Gulf and its surrounding lands contain the world’s largest reserves of hydrocarbons and four of the world’s five largest oil fields (in Saudi Arabia, Kuwait and Iran) ship their products through this narrow stretch of water. According to business analysis firm keplerFor example, last year 31% of crude oil passed through Hormuz, as well as 34% of global fertilizer supplies and 32% of methanol. The closure of the Strait sent oil prices soaring this week. There were double-digit rises and falls according to events and the latest whims of the US President about war.
What about gas?
Perhaps even more interesting for the UK is the fact that 24% of natural-gas liquids and 19% of liquefied natural gas (LNG) also pass through the strait. The UK is at the beginning of a historic shift from reliance on domestic and Norwegian gas towards far greater imports of Qatari gas (i.e. from within the Persian Gulf, which is projected to make up a larger share of the mix than North Sea gas by 2035). There has been a rise in the prices of petrol and diesel At the pumps, but wholesale gas prices have increased nearly 60%, and will rise soon household bill and business costs. Nor is it just hydrocarbons and related products, says Neil Shearing at Capital Economics. Such crises have a habit of exposing chokepoints that were previously hidden. Qatar produces 40% of the world’s helium, for example, important for the production of semiconductors.
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Who will be most affected?
The Middle East itself will be hardest hit economically, with lives lost and communities destroyed. During last summer’s 12-day war, Israel’s economy shrank by about 1% in the second quarter. If the current conflict is short-lived, a decline in output of similar magnitude for both Israel and the Gulf economies would seem plausible. Iran itself can expect a decline gross domestic product Of 10%. Otherwise, the most exposed region is the world’s biggest growth engine, Asia. According to The Economist, the Gulf supplies 40%–80% of China, India, Japan and South Korea’s seaborne crude oil imports. It accounts for about a third of China’s LNG imports, more than half of India’s and even more for some smaller Asian countries. Last year, 87% of crude oil and 86% of LNG passing through the Strait of Hormuz went to Asia, making the prolonged closure a serious threat to the region.
Will global GDP fall due to war on Iran?
Yes, but unless the conflict escalates into a broader regional war in which oil supplies are severely disrupted over a long period of time, most forecasts are around a moderate global recession (less than 1% of global GDP) rather than a catastrophic collapse. But it is very difficult to predict the situation. In the event of (say) a month-long closure of the Strait of Hormuz, there would be major damage to the Gulf’s oil infrastructure and oil prices would rise to $150 – unlikely, but not impossible – with analysts suggesting that global GDP would decline by up to 3%. Although oil-sector experts are nervous, macroeconomists remain relatively optimistic Paul Krugman on Substack.
Partly this is because the US and other major economies have changed significantly since the 1970s. “They have become much less dependent on oil, and they are much less likely to experience an inflationary spiral following an oil price shock.”
How long can the war on Iran last?
Rana Faroohar says, “My bet: More time than you wish.” financial Times. Whereas donald trump Given the lack of clear objectives and the political damage caused by rising petrol prices, there is reason to end the conflict quickly, saying the Iranian regime “certainly has much to gain from prolonging the pain with drone attacks and attacks on neighbors in the Gulf. This would disrupt energy markets, leading to inflation around the world”. As analyst Luke Groman said Recent Newsletter“Iran doesn’t have to defeat the US military; it just has to defeat the US Treasury market”.
What should we expect next?
As the experience of the Ukraine war showed us, “inflation is not a single blow”: it hits first in fuel, then in food and other consumer sectors. Meanwhile, China, easily the largest buyer of Iranian oil, can still “leverage its geo-economic advantage to buy ports around the world” and “control most of the shipping on the planet”. Higher shipping costs create more inflationary pain. And potential bond-market weakness is made worse by short-term, price-sensitive investors holding more government and corporate bonds than in the past. All this makes it easy to imagine a rapidly unfolding US and global market crisis. If it has long term effects trumpThe exotic adventure of having to “push up” bond yieldsInflation (which would only be partially mitigated by America’s own domestic energy supply) and US deficits and would eventually trigger a massive Treasury selloff, causing huge losses to the US and the global economy. Sadly, I suspect this war and this market story will be with us for some time.
This article was first published in Moneyweek magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts moneyweek membership.