The drumbeat for a US or Israeli-led confrontation with Iran is growing. But an attack would have serious economic consequences for the region — and the global economy.
A military conflict could see Brent spike to $175-200 a barrel, according to independent analysts. The Arab Spring saw crude peak at $127 a barrel. Iran accounts for 5.2 per cent of global production, more than Libya, Egypt, Tunisia and Yemen combined.
The risk is magnified by Iran’s potential to disrupt the flow of oil through the Strait of Hormuz, which carries 40 per cent of all seaborne-traded oil, according to Barclays Capital. Even if the presence of the US Navy’s Fifth Fleet help keep oil flowing, fear will keep prices elevated.
Saudi Arabia may support a strike, but it would be stretched if it wants to use its oil power to keep prices under control. Alternative exports routes are few. OPEC spare production capacity is only 3.6 mbpd — less than Iran’s. Saudi will also need more than $80 a barrel if it tries to limit the impact on strategic, and politically vulnerable, oil importing neighbours like Jordan, Morocco and Bahrain.
An armed intervention would add more pressure to the US financial position. It is difficult to quantify. But even a “short” conflict could involve the US in operations around the Strait of Hormuz for months. The impact would depend on the exact scenario. If a single oil tanker came under attack, global markets might shed five per cent and local markets 10 per cent, according to an analyst. A leap in the risk premium will stall refinancing efforts of companies across the region, including Dubai.
Anything more severe, like repeat or sustained attacks that questioned the status of the Gulf as a safe haven, or the stability of the Lebanese banking system, could trigger a major capital flight. Foreign investors’ shares in equity markets in West Asia range from a low of two per cent in Abu Dhabi to a high of 14 per cent in Egypt, according to EFG Hermes estimates.
With the risk of a minor confrontation spilling over into something bigger, trying to delay Iran’s nuclear programme by force, after sanctions failed to reach the goal, could come at a steep cost.
