The threat of war may cripple economic recovery

Nouriel Roubini writes: Today’s fragile global economy faces many risks: the risk of another flare-up of the eurozone crisis; the risk of a worse-than-expected slowdown in China; and the risk that economic recovery in the United States will fizzle. But no risk is more serious than that posed by a further spike in oil prices.

The price of a barrel of Brent crude, which was well below $100 in 2011, recently peaked at $125 (U.S.). Gasoline prices in the U.S. are approaching $4 a gallon, a damaging threshold for consumer confidence, and will increase further during the high-demand summer season.

The reason is fear. Not only are oil supplies plentiful, but demand in the U.S. and Europe has been lower, owing to decreasing car use in the last few years and weak or negative GDP growth in the U.S. and the eurozone. Simply put, increasing worry about a military conflict between Israel and Iran has created a “fear premium.”

The last three global recessions (prior to 2008) were each caused by a geopolitical shock in the Middle East that led to a sharp spike in oil prices. The 1973 Yom Kippur War between Israel and the Arab states led to global stagflation (recession and inflation) in 1974-1975. The Iranian revolution in 1979 led to global stagflation in 1980-1982. And Iraq’s invasion of Kuwait in the summer of 1990 led to the global recession of 1990-1991.

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2 thoughts on “The threat of war may cripple economic recovery

  1. Steve Zerger

    Oil supplies are plentiful. We keep hearing this. And of course it’s true that there is a lot of oil still in the ground. But oil flows are barely adequate for current worldwide consumption, and are only sustainable with massive deployment of capital, which of course requires a high price. It is an inadequate analysis to say that supplies are plentiful and that demand is low, but that the fear of any disruption is driving the price to damaging levels. Why do economists have such a difficult time grasping the simple and obvious concept of natural limits?

  2. Norman

    As that old saying goes, “the market goes up, some make money, the market goes down, some make money” just not the majority or 99+% of the population of the world.

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