The Iran war is metastasising into a global economic calamity. Ever since the US and Israel launched strikes on the Islamic republic on February 28, financial markets have been lulled by the belief that the conflict would not last long. In turn, they have discounted the threat of a severe disruption to the Strait of Hormuz, through which around a fifth of the world’s oil and liquefied natural gas is shipped. But hostilities are entering a fourth week and the prospects of de-escalation seem to wax and wane every 24 hours. In recent days Israel and Iran have also each inflicted lasting damage on critical regional gas facilities. The worst-case scenarios for investors and policymakers are now coming into view.
In volume terms, a prolonged closure of the strait would amount to a greater oil shock than those triggered by the Yom Kippur war and the Iranian Revolution in the 1970s. The global economy today depends less on oil for energy, but the fuel is still important in transport and industry. Oil prices have risen around 50 per cent to over $100 a barrel since the war started. As traders increasingly assume the region’s oil supply will be locked up for a long time, analysts reckon the price could exceed $150, a level which, if sustained, would raise the probability of a worldwide recession.
The threat to global gas supplies has also become more real this week. Qatari officials said retaliatory Iranian attacks on Wednesday had caused years-long damage to its Ras Laffan LNG plant, the world’s largest, which had already ceased production since March 2 due to earlier drone strikes. Gas prices have surged across Europe and Asia. The blockage of fertiliser, helium and sulphur supplies in the strait is also alarming industries from chipmaking to farming.