The economic fallout from bombing Iran

Romesh Ratnesar writes: The economic case against war is strong. Jitters about instability in the Middle East have caused the price of Brent crude to rise some 9 percent since the beginning of the year. Even a limited conflict with Iran—the second-largest oil producer in the Organization of Petroleum Exporting Countries, after Saudi Arabia—would jack up insurance premiums on oil tanker traffic through the Persian Gulf. Iran exports 2.5 million barrels per day, and OPEC lacks the spare capacity to make up for the likely loss of Iranian supply in the event of an attack, according to Robert McNally, president of the Rapidan Group, an energy consulting firm. That’s a formula for an oil shock far more painful than what global consumers are currently experiencing. “What we see now is a market that is very fearful and very tight,” says McNally, a former senior director for international energy at the National Security Council. “In those conditions, it doesn’t take much to send the cost of oil soaring.”
If the U.S. attacks, “the Iranians might feel they have less to lose” by retaliating aggressively, says Michael Makovsky, foreign policy director of the Bipartisan Policy Center in Washington. Tehran might attempt to sabotage oil facilities in Saudi Arabia and southern Iraq, launch missiles into Israel, or deploy small attack vessels to harass tankers in the Arabian Sea. The nightmare scenario would be a move by Iran to choke off access to the Strait of Hormuz—most likely by unleashing its stockpile of 2,000 mines—through which as much as 40 percent of the world’s seaborne oil travels. The U.S. has warned that such a step would provoke an all-out assault on Iran’s military. Would Tehran take that risk? “If Iran concluded its regime were threatened, it might try to make the conflict as big as possible, as quickly as possible, to bring other powers in to mediate,” says McNally.

An analysis by the Rapidan Group predicts that a targeted airstrike on Iran, followed by a token Iranian response, would cause oil prices to jump $23 a barrel before settling back down. (As of March 6, Brent crude was trading at $122 a barrel.) A more protracted conflict, if it involved even a brief closure of the strait, might cause oil prices to spike by more than $60 a barrel. “It would be the biggest geopolitical disruption in the history of the global oil market,” McNally says. Ed Morse, global head of commodities research at Citigroup (C), estimates that if oil were to reach $150 a barrel, the U.S. would lose two percentage points in economic growth, enough to turn the nascent recovery into a recession.

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