It’s official. It’s official.
Donald Trump’s military decision comes after months of proxy war between Israel and Iran.
The economic assumptions which have driven markets for many years could come to an end.
Shockwaves from oil price spikes, inflation worries, Strait of Hormuz, to Beijing’s bargaining tables are all forming.
What happens next, how central banks and governments react, will determine whether this becomes a global crises or another spike.
What is the maximum extent of this conflict?
Airstrikes that were precise and targeted. Trump struck three Iranian nuclear sites after Israel gave him space to reduce Tehran’s missile range.
The Iranian leadership has already threatened to retaliate, but it is not clear how they plan to do so. Iran’s economic situation is too fragile to support a long-term conflict between the US and Israel.
There are currently no indications of an invasion of full scale or a deployment of American forces. The public doesn’t seem to support this. Most Americans are against a military conflict with Iran.
Trump’s past is consistent with this sentiment. So far, there have been only a few strikes and big announcements.
It’s not the first time. In 2020, the assassination Qasem Solimani followed a similar playbook. First remove a target of high value and then retreat.
He’s relying on precise power this time to avoid a prolonged war and pressure Iran. While the risk to the military is calculated, it’s much more difficult to manage the consequences on the economy.
The red line for oil is still there
Iran is not the cause of global economic vulnerability. This is about geography.
Strait of Hormuz is a channel that is 21 miles wide and transports 20% of daily world oil supplies. It also carries a large amount of natural gas liquefied.
Iran repeatedly warned to shut it down even before US attacks. The Iranian government has done this in the past, but only limitedly. For example, it’s seized tankers and laid mines or harassed vessels using speedboats.
Iran has disrupted Gulf shipping in the past, including incidents that occurred as recently as 2023.
Iran has the ability to disrupt or block traffic if it acts with greater force. The IRGC can strike vessels, mine waterways, or make passage too dangerous for insurance companies.
Already, there have been threats made against European fuel vessels.
Bloomberg Economics predicts that an oil price of $130 per barrel would be reached if the Hormuz Strait was completely closed.
This could push US inflation to just 4%, and force the Federal Reserve either to cancel or delay its rate cut plans.
Energy imports are also a major factor in the growth of countries such as Germany, Japan and India.
History suggests that any closure of the Strait will be temporary. Brent crude prices doubled during the Gulf War of 1991, but returned to normal months later.
Similar spikes were seen in 2003 and 2022, both during the Iraq war. Why? Why?
Early signs of a market reaction, even without an official closure are evident. Crude oil derivatives rose 8.8% after the strikes.
Who gains and who loses?
The US economy has a better position than others. The US economy is better positioned than most.
When oil prices increase, US oil companies gain, but transportation and manufacturing firms suffer. Overall, however, the economy remains stable.
The recession risks are low, even though inflation may increase.
Russia could, however, benefit from this chaos. Higher oil prices are a boon to Moscow, as it is a major supplier.
Russia, in particular China, could be an important partner to countries seeking to avoid US influence.
China is in an awkward position. China is the recipient of nearly all Iranian oil exports, which are sold at steeply discounted prices of about $6 per barrel below market rates.
China will not only have to search for new suppliers, but it’ll also have to pay the full cost if this supply is cut off. This is a blow for China’s industry, and its leverage at a time when the economy struggles to recover.
Europe is also exposed. It imports less crude oil from Iran directly or via Hormuz but it is still dependent on stable prices.
Gas prices in Europe could rise if Qatar’s LNG exports, which flow also through Hormuz are interrupted, particularly during winter.
The eurozone is already in a state of stagnation. This would add to the pressures that are already being felt by higher interest rates, and weaker consumer demand.
Market overreaction or underestimation?
Oil is still a commodity that’s available worldwide, even if Iran disrupts the Hormuz Strait.
Gulf oil exporters have some flexibility to change their routes. Saudi Arabia runs a pipeline that transports 5 million barrels per day from Gulf oil fields to the Red Sea.
Hormuz is bypassed by the UAE, which has 1.5 million barrels per day of oil pipeline to Fujairah.
Iraq, Kuwait and Qatar, who all are major exporters, do not have viable alternatives. The global economy and their revenue would be severely affected by a complete shutdown.
Oil can be transported anywhere at minimal costs.
Europe may buy more goods from Latin America and the US while Asia might shift to Saudi Arabia or Iraq.
This is a misunderstanding of how the markets actually work. Short-term, oil demand remains inelastic. Regardless of the price, people still drive cars, businesses still ship goods, and government buildings still need to be heated.
Even a minor disruption could cause prices to spike. Few tankers being pulled out of the Gulf can cause a panic far beyond the Persian coast.
Geopolitical psychology is also ignored. Investors hate uncertainty.
Right now they are looking at an American president who could bomb again, Iran, which feels cornered and a volatile Israeli front. They also see multiple failure points on the energy map.
Next?
Three possible paths are available.
The conflict is contained in the limited cases where Iran attacks US assets or bases. The oil price rises modestly and inflation increases, yet central banks remain steadfast.
Iran could target Gulf commercial or infrastructure tankers in a scenario of medium-range. Strait of Hormuz is now semi-operational. The price of oil reaches $110 to $120.00.
While global growth stagnates, the Fed, ECB and other central banks freeze their rate reductions.
Worst case scenario, Hormuz would shut down completely. Crude surges past $130. Inflation reaches 4-5%.
Rates of interest will remain high until 2025. Europe and Asia are facing energy crises. China scrambles for oil sources at higher prices. Russia benefits. The markets are spiraling upwards.
But one thing is for sure: The era of geopolitics without risk is gone. Welcoming back volatility.
The post What the US strike on Iran means for global economics: A war that markets weren’t prepared for may change as new developments unfold.
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