"Armageddon." That's the word that was circulating among Wall Street analysts on the day oil topped $110 a barrel. "Apocalypse" and "a nightmare" — adds another. &Pire;Before the conflict erupted, crude oil was trading around $65. Just a month later, the price was up 70%, and natural gas had jumped nearly 100%.
For half a day this week, the world was in a state of shock after Donald Trump's comments that talks were underway with Iran. ΠThe missiles, bombs and drones continue to fall, and the uncertainty about the global economy only grows more.
ΠThe president of the International Energy Agency, Fatih Birol, has already spoken of "the greatest threat to energy security in history". Israel bombs the largest gas field in Iran. In response, Texepan hit the Pac Laffan refinery in Qatar — the world's largest liquefied natural gas facility.
The narrow waterway, through which one-fifth of the world's oil, one-quarter of its gas and one-third of its cargo passes, is effectively blocked.
The opposition has already said the price will reach $150. The problem is whether it will stop there.
Shock mechanics
The numbers are brutal. According to IMF calculations, cited by El Rais, every 10% increase in oil prices over a year leads to a 0.4% increase in global inflation and a 0.15% drop in economic growth.
Πri $150 per barrel would send the world into recession, and inflation would exceed 6%. ΠAt $200 the picture gets drastically worse.
Zacks Investment Research compares the American measure: at $200 per barrel, gasoline in the US will likely exceed $6.50-7 per gallon. RBC estimates that for every $10 cut, consumers lose between $25 billion and $35 billion in annual purchasing power.
ΠAt $200, this translates into over $400 billion in lost discretionary spending — a direct hit to retail, tourism, and hospitality. Low-income households, which spend a disproportionately large share of their budget on energy, will be hit first.
ΠThe vicious cycle is well known, explains The Atlantis: cheaper fuel raises the prices of everything — from groceries and groceries to plane tickets and online deliveries. ΠConsumers cut spending, companies stop hiring, then they close, the unemployed spend even less. This cycle can continue even after the end of the entire price shock.
A trap for central banks
For monetary policymakers, the war in Iran poses the classic dilemma of stagflation — and at the worst possible time.
ΠAt $200 a barrel, core inflation in the U.S. is likely to exceed 7-8%, according to analysts at Zacks. Normally, the Federal Reserve would respond to a recession by cutting interest rates. But with inflation at 8%, that's impossible — Interest rates are likely to be held or even raised to 6%.
The result: cheap credit in a shrinking economy, making the contraction even more painful.
El Rais added that central banks around the world would be put to a test the likes of which they have not seen since the 1970s — The oil embargo following the Cyprus War is causing the most severe economic contraction in recent memory.
The geopolitical winners
If the financial consequences are severe, the geopolitical ones are lasting.
The country that stands to gain the most from a prolonged crisis is Russia, warns The Atlantic. Moscow directly controls all the huge oil revenues — a price jump of that magnitude would fill Putin's coffers and give him additional leverage in the Ukraine talks. Western sanctions would lose a significant part of their effect.
Moscow could take advantage of the weakening of Western economies in Europe and become even more aggressive in its attempts to seize new territories.
China is in a more complicated position. In the short term, it is vulnerable — The world's number one oil importer, with over half of its supplies coming from the Middle East. It has accumulated reserves of about 1.2 billion barrels, enough for almost four months. And it has built an alternative energy infrastructure: over half of new cars in China are electric, the country produces more than 60% of the world's wind turbines, over 80% of solar panels and about 90% of the rare earth metals it processes.
ΠA prolonged crisis would force the rest of the world to turn its back on these technologies — and to their dominant producer.
"I don't think it would be foolish after all of this for countries to start looking at China as the least bad option on a menu of many bad options," said Jason Bordoff of the Center for Global Energy Policy at Columbia University, quoted by The Atlantic.
This would also legitimize the ambitions of Πeĸin in Asia and beyond. And in the US, Donald Trump will have a painful need to divert attention from the economic woes of the electorate, and not surprisingly, this will make Washington's foreign policy much more aggressive.
No easy way out
American shale oil production could grow by about 1 million barrels per day — insufficient to compensate for the blockade in the Ormuz Stream.
Fatih Birol recommends urgent measures: three additional working days from home, a 40% reduction in business flights, free public transport and speed limits on highways.
Scott Model of Raritan Energy, a former CIA analyst, sees a fully realistic price of $200 a barrel with another month of production. My company modeled a 7-day and 30-day closure of the Ormuz Stream 4 years ago. The conclusion back then was that market expectations for a quick end to the conflict following American intervention were simply wrong.
"There has rarely been a global recession in history that hasn't been preceded by a spike in oil prices. "I don't see how prices can stay at $150 for long without becoming a serious threat to the global economy," he said.
ΠAt $200, that threat is no longer hypothetical.