If the conflict between Iran and Israel begins to ramp up, economic consequences will be much more serious than today. Experts are talking of two hard scenarios. And the hardest one can be only compared with the 1973 oil crisis. What price will the world pay for a full-scale war in the Middle East?
The conflict between Iran, which has restored its pre-sanction oil output, and Israel has already caused an increase of oil prices. In just two days, October 1 and 2, the prices jumped from 70 to 76 dollars per barrel, having regained half of the September reduction. Just for October 2 the stock exchange prices of gas grew by 3 per cent in Europe, as Israel stopped two production projects.
‘Russia and its budget are benefitting from this situation, as with a weak rouble, which is currently being traded at around 95 roubles per dollar, and high energy prices the Russian budget is getting additional oil and gas receipts’, notes Alexey Grishchenko, Professor, Operations and Industrial Management Chair, Higher Management School Department of the Financial University under the Government of the Russian Federation.
The prices of precious and non-ferrous metals also increased by 1.5–2.5 per cent for two days, because metals are needed for the production of weapons. Stocks of weapon producers are growing. But the price of gold did not rise and the dollar remained flat. Stock markets are declining too, but slowly.
In general, the response is not that bad. However, economic consequences can be far more significant, if Iran and Israel’s conflict becomes a full-fledge war. Who can benefit from this, who will win if the conflict escalates and who will inevitably lose? The medium hard scenario is when the parties strike specific targets and when Israel turns to striking oil and gas facilities in Iran’s territory.
‘There are several options here. Israel can hit the oil fields or the port infrastructure to prevent Iran from exporting oil. Strikes on oil fields is worse, as it will take more time to repair them. But they are spread geographically so multiple targets have to be targeted. The port infrastructure is concentrated in one place, striking it is easier, but fixing it is also easier and takes less time. But when it comes to reducing Iran’s revenues, of course, it makes more sense to hit the oil infrastructure instead of gas facilities, as the country earns revenues in foreign currency from oil exports. Iran’s gas infrastructure is not that big, with low export volumes’, believes Igor Yushkov, an expert of the Financial University under the Government of the Russian Federation and the National Energy Security Fund (NESF). Oil export reduction will affect all global oil consumers, as prices will grow and they will have to pay more to buy any ‘black fuel’.
After the sanctions Donald Trump imposed against Iran’s oil, Iran restored its oil production to the pre-sanction level of 3.4 million barrels per day, with 1.5–1.7 m barrels per day sent for export. China will suffer the most from this lost export being, in fact, the only buyer of the Iranian oil. ‘China will lose twice. First, it will not be able to buy Iranian oil with a discount from the market price and will have to buy alternative oil at its real cost. Second, any oil across the world will get more expensive because of this conflict’, says Yushkov.
As a result, all those buying oil will be affected. ‘These are quite large export volumes, even if half of this is no longer available in the global market, this will be already tangible and prices will go up’, says the NESF expert. This is exactly why U.S. greatly opposes Israel’s striking Iran’s oil producing facilities.
‘The current U.S. administration does not need escalation right now at all, stopping the confrontation is in their interests. Because it will elect president in just a month and if oil prices increase now, petrol and diesel prices at American service stations will jump right ahead of the election. And for Americans this will mean the Dems are failing’, says Igor Yushkov.
‘Probably, the Biden administration will urge Israel not to push it too hard on Iran, as an escalation to a full-fledge war might make Iran close the Strait of Hormuz and American customers will see quite unpleasant prices at service stations right before the election’, says Grishchenko.
The hardest scenario implies that the conflict spirals on and the parties exchange harder strikes against each other reaching the most radical scenario affecting the oil market. This is the closure of the Strait of Hormuz, which is used to transport up to 20 per cent of the world’s oil and around 20 per cent of liquefied natural gas.
‘They often speak of closing the Strait of Hormuz, but this is considered a last resort. If Iran’s leadership feels an existential threat someone is trying to wipe out today’s Iran, they might close the Strait of Hormuz, indeed. If it is closed for just a few days, this will certainly lead to a global energy crisis. Because 20 million barrels per day will be deadlocked in the Gulf. This is a significant share of oil from Saudi Arabia, UAE, Kuwait, Iraq, Iran. The gas industry will also be in a harsh crisis, as all the LNG from Qatar will be locked, which is a huge volume. If this is the case, we might witness 120 or even 140 dollars per barrel and a few thousand dollars per thousand cbm of gas’, comments Yushkov speaking about the consequences.
‘Everyone will suffer, of course, not just oil consumers. This will be comparable to the 1973 energy crisis when the Arabic countries stopped supplying oil to the West. This time the impact will be exactly the same: an immediate shock in the global markets’, says Yushkov. ‘In case a large-scale war breaks out involving U.S. when Iran will strike various Israel’s military bases, oil prices might increase by 95 to 120 dollars per barrel. At this price oil will still find customers. Because if the prices go beyond 150 dollars per barrel, no one will buy oil anymore.
This means a recession for the global economy. Inflation will increase everywhere. The inflation rate in developed states hitting the 15 per cent mark will lead to the food inflation reaching 30–35 per cent, which is a global crash indeed. The dollar will devalue, while the price of gold will grow as a safe haven asset. There will be a food crisis in China caused by the scarcity of energy resources. China will be switching to alternative energy sources more actively. Such a war will provoke a quicker turn to new energy sources globally’, such an outlook of the consequences of the worst scenario gives Murad Sadygzade, President, Centre for Middle East Studies, a visiting lecturer at the Higher School of Economics.
In fact, no one wins if the conflict escalates so deep, except for radical powers in Iran and Israel itself, which also support nuclear bombing, Yushkov says. Military conflicts are, certainly, to the benefit of the key suppliers of weapons to the Middle East – these are American, French, British and German companies whose shares are growing, notes Murad Sadygzade.
Russia and the Northern Sea Route can get their own benefits. ‘The tensions in the Middle East will lead to the undermining of goods supply chains, so it will be necessary to develop new northern routes via the Central Asia through Russia, via the Northern Sea Route’, notes Murad Sadugzade. However, in general bringing the conflict to such a scale is also disadvantageous for Russia. And here is why.
‘Of course, it will receive lots of cash, but ultra-high prices kill demand, so we will see the collapse of global oil and gas consumption. For Russia, it is better when Israel hits limited strikes on Iran’s oil infrastructure so that prices increase to 90 dollars per barrel. Such a global rate will not kill the demand but will increase the price of Russian oil to 70 dollars per barrel, which will help it earn well and fill its budget’, explains Yushkov.
In case of the unfavourable scenario, which the Bank of Russia has already called ‘a global crisis’, Russia’s GDP might reduce to 3–4 per cent and the inflation go beyond 10 per cent. That is why Russia will benefit from an immediate settlement of the Middle Eastern conflict from all aspects, primarily, the economic one’, agrees Sergey Grishunin, Managing Director, NRA Rating Agency.
As a matter of fact, Iran is not happy to be dragged into this conflict, as it has just restored its oil infrastructure, production and export volumes and would not want them to be hit. That is why experts are so far optimistic, like the markets, believing that the conflict will subside, as it might come at a very high cost for the entire world.