Iranian Embassy Under Destruction

The Price of Conflict: Economic Impacts of Potential Iran-Israel War

Over the weekend, Iran sent over 300 drones and missiles towards Israel. This was in retaliation to Israel’s airstrike in Damascus on the Iranian consulate, which killed two senior Iranian Generals.

Although nothing severe has occurred yet, the threat of a full-blown war makes us consider its possible financial implications.

Oil and Gas Supplies: Strait of Hormuz

On April 9, IRGC Navy Commander Ali Reza Tangsiri stated that Iran would close the Straight of Hormuz if Israel continued to be a threat to Iran. This was said during an interview with Lebanese-based terrorist group Hezbollah. 

The Straight of Hormuz is a waterway between Iran and UAE, which starts from the coast of Kuwait and eventually reaches the Arabian Sea. It witnesses the transport of a significant proportion of the world’s natural energy resources from the Middle East. 

Image Belongs to Copyright Holder: From Aljazeera

This includes 13% of the world’s liquified gas and 35% of the world’s oil. This could have detrimental effects on some countries that rely upon these resources. Oil and energy prices could go up significantly.

It is important to note that closing the waterway also has consequences for Iran. Their non-oil trading will also be cut short.

Currently, oil prices have not significantly spiked. The attacks were diffused quickly by Israel’s allies, such as the USA, and retaliation has not occurred yet.

Oil prices have even dropped 1%, according to EuroNews Business. West Texas Intermediate (WTI) fell to $84.80 and Brent Crude fell to $89.50. However, investors remain wary, and risk premiums for oil have risen around $5 to $10.

Iran’s oil production is around 3.4 million barrels a day, most of which is exported to China. China, along with other countries that import oil from the Strait of Hormuz, may feel these effects too.

Safe Haven Assets

Investors may move their oil investments to more risk-free assets, such as Gold, Silver, and the US Treasury. These commodities will be relatively unaffected by a war and are less volatile. Gold and Silver prices may rise as a result.

Emerging countries, such as India, may be affected by this too. High oil prices cause inflation which slows economic growth. Investors may be cautious of this and quickly move their capital to less risky commodities. This way, India could take a hit too.

Image Belongs to Copyright Holder: From Bankrate

Once again according to EuroNews, Gold prices have still only risen 0.4% once again due to the efforts of other countries to diffuse the situation. Silver has seen a more modest increase of 1.3%.

GDP and Inflation

As mentioned earlier, high oil prices can lead to slow economic growth and hyperinflation. The International Monetary Fund (IMF) released a report on the Global Economic Fallout of a Regional War. Iran, Lebanon, and Yemen suffer the highest GDP and inflation consequences. 

If these countries’ efforts for war continue to persist, Iran’s GDP will drop by 5% according to the report. Iran’s inflation will have an over 100% increase. Similarly, Lebanon and Yemen’s GDP will decrease by 20% and 8% respectively.

The IMF also predicted that a regional war could reduce the global GDP by 0.4%.

Ukrainian War

Some claim that conflict in the Middle East diverts the attention of Western powers from sending aid to Ukraine. However, many adverse effects may arise with this notion.

Iran is a significant supporter of Russia in the Ukraine war, consistently sending weapons and aid packages to Russia. This may not be the case anymore. Iran also provides a ‘ghost fleet’ (as referred to by Business Insider) for Russia to transport its natural gas and oil. This keeps Russia’s oil revenue flowing to some extent. Once again, this may not be the case anymore.

Image Belongs to Copyright Holder: From AP News

During a time of struggle, Iran may ask for more support than Russia can offer. This may hinder the longstanding relationship of the two countries.

Russia has taken advantage of conflict and instability in Middle Eastern and North African countries for a while now, posing as a peacemaker and security guarantor. Another war may take a blow to Russia’s Middle Eastern influence. To extrapolate even further, a vacuum of Russia’s influence may draw other competitors such as China to the middle east.

In summary, the economic fallout of an Iran-Israel conflict has the potential to disrupt global energy markets, supply chains, and economic activity in the Middle East. It will affect countries around the world, from Russia and Ukraine to India, China, Lebanon, and Yemen.

Countries such as the USA, France, the UK, and Jordan are doing their best to diffuse the situation, but we can only wait and see what occurs next.

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Cover Image- The Globe and Mail