JAKARTA (TheInsiderStories) – A lengthy conflict in the Persian Gulf could tip the United States (US) and global economies into recession and even accelerate the worldwide move away from fossil fuels. Oil could jump to US$150 a barrel or higher immediately after a war breaks out, London-based Capital Economics said in a recent research note.
“If war were to break out, we estimate that the price of oil would quickly surge to around $150 a barrel or higher immediately, but would likely settle closer to $100 once some resilience of exports from the region is demonstrated,” the report said.
The conflict could prompt the closure of the Strait of Hormuz, through which one-third of the world’s seaborne oil passes. While the rise of US shale might mute the impact a bit, it can’t offset any major disruption in the Middle East.
Crude could spike towards $90 a barrel before eventually collapsing amid the negative impact on global demand, it said. The level it reaches will depend on the ability to maintain safe passage through the Strait of Hormuz.
In the case of a full regional conflict, the oil will rise past $100 a barrel and could even go to $150. If there are only limited strikes, oil might reset at around $80.
Liquefied natural gas (LNG) prices may rise more than oil prices due to the fact that a greater proportion of global flows pass through the Strait of Hormuz than for oil. Whatever the spike you get in oil, you will likely get twice the spike in spot LNG, the report said.
The market is largely discounting the chance of war at the moment, it said. If there are a major attack and reprisals, Brent could go to $90 to $100 a barrel. LNG would be impacted as well, but the market is oversupplied and is dominated by Qatar, which has good relations with Iran, so it’s unlikely to be targeted by Tehran.
Abu Dhabi in the United Arab Emirates (UAE) is most vulnerable to conflict because its oil installations are in a small area, unlike in Saudi Arabia where they are very spread out, the report said.
Japan, India and South Korea would be some of the most vulnerable economies to a Persian Gulf war due to their heavy dependence on the region’s crude. India imports more than 80 percent of its oil and around two-thirds of that comes from the Middle East. Every 10 percent increase in the price of a barrel of crude widens the nation’s current-account deficit by about 0.4 percent of gross domestic product, the report showed.
In a limited confrontation, the flow of oil and other commodities should continue through the strait, with the caveat that certain oil tankers could be targeted by Iran, it said. In a major war, Iran could shut the strait and lay mines.
A concerted effort will be made to keep the strait open, and before any military strike begins, a plan to protect ships will have been worked out with other regional countries, such as Saudi Arabia. Insurance costs will skyrocket, or there will be no cover at all, and shipowners with no cover may be reluctant to risk their ships.
If a ship is sunk in the strait, it might close for a couple of weeks, but then traffic will resume. If the Iranians try and shoot everything that passes, then the British, French and everyone will get involved.
The Iranian nuclear deal looks all but dead just one year after US President Donald Trump administration walked away from it and reimposed crippling sanctions on the Islamic Republic. As Iran’s government starts breaking its agreed uranium enrichment limits, the European Union (EU) leaders are floundering to keep it alive.
British Foreign Secretary Jeremy Hunt claimed Monday that the Barack Obama-era deal — signed by the US, British, Iran, Russia, China, France, and Germany in 2015 and intended to provide Iran economic relief in exchange for limits on its nuclear program — “isn’t dead yet.”
Other European lawmakers frantically stress the dangers of killing the deal, while Tehran says it can always reverse its deal breaches if the EU defies American sanctions and resumes trade with Iran — something it appears largely unable or unwilling to do.
Written Willy Matrona, Email: firstname.lastname@example.org