Shock shock: the effects of the Iran-Israel war on the economy

The conflict, which has now flared up again on an unprecedented scale in the Middle East, immediately shook world markets, leading to a sharp increase in oil prices and a decline in stock market quotations. But this may be just the beginning of the shock: if Iran, for example, closes the Strait of Hormuz, there may be an oil shortage that has not happened since 1973 and which will send the world economy into a recession comparable in depth to covid. Details can be found in the Izvestia article.

"This time it will be different"

Historical tradition has forced traders in the oil market to react extremely sharply to any sudden movements in the Middle East. The lesson of the 1973 "oil shock" was too strong, when, as a result of the Yom Kippur War, the Arab OPEC countries imposed an oil embargo on countries that supported Israel, as a result of which oil prices increased fourfold in a matter of days. A smaller, but also quite serious shock was associated with the Gulf War of 1990-91. Over time, the memory of those events began to fade. The global economy is used to the fact that something is always happening in the Middle East, but this does not decisively affect the supply chain on a global scale. This was the case during the start of Israel's operation in Gaza in the fall of 2023, and during other periods of escalation. The reaction was a little more lively after the Houthis began shelling ships in the Bab el-Mandeb Strait, but even then there was no radical price increase.

For a long time, the "undeterred" traders did not realize that something serious was happening in the region this time. The Israeli-Iranian escalation took them by surprise, but after the start of a large-scale exchange of blows, the markets reacted immediately. On Friday, the Brent brand, for example, jumped by 13%. Later, the explosive growth was stopped, but prices still exceeded $70. The realization that the consequences could have an impact on the whole world came, albeit after the start of mutual shelling.

Minus 1%

What exactly can happen? The main effect of the current war will be on the oil (and maybe gas) market. This, in turn, will affect the entire global economy, which, despite the green transition, is still extremely vulnerable to a shortage of either black gold or blue fuel. Iran, although limited by sanctions, remains a major player on the world stage — its exports of oil and gas condensate amount to about 2 million barrels per day. If the escalation does not stop, and Israel attacks oil facilities in Iran, it is quite possible that a third or even half of these capacities, that is, about 1% of global needs, will be disabled. Thus, the effect of two OPEC+ production increases (by a total of more than 800,000 barrels) can be more than removed from the table.

Of course, OPEC+ may start increasing production again to compensate for the falling volumes — there is free capacity, and there are many of them (up to 4-5 million barrels per day). But this is not so easy to do politically: if Riyadh and other Gulf countries do this, Iran may accuse them of colluding with Israel and the United States. This is not just a significant loss for the image of Arab Muslim states, but also threatens them with direct confrontation with Tehran. In addition, Saudi Arabia and other players in the region hardly have anything against a reasonable increase in oil prices. After all, Riyadh needs about $100 per barrel to balance its budget.

— The recent strikes on Iran have already had a noticeable impact on the price environment: The price of Brent crude oil increased by almost 7%, reaching about $75 per barrel. As for the immediate prospects, there will most likely be no significant supply disruption. If the Strait of Hormuz remains open, prices are likely to stabilize in the range of $70-80 per barrel. But even with such a "neutral" scenario, high volatility remains: new statements or local incidents can cause short-term spikes. Therefore, it is important to closely monitor the development of the situation in the region, Ivan Timonin, head of the "Implementations" projects, said in an interview with Izvestia.

An increase in oil prices to these levels does not threaten any serious disturbances outside the region. Last year, these indicators did not exceed the "norm" at all. Global economic growth may slow down by a couple tenths of a percentage point, but it is unlikely beyond that. For Russia, such price levels mean an increase in export revenue and support for budget targets. An increase in the price of oil by $ 10 per barrel may increase revenues to the treasury by 2-3 trillion rubles per year. However, it all depends on other parameters. Almost certainly, expensive oil will further strengthen the ruble, which on the one hand will slow down inflation, on the other — will encourage the Ministry of Finance and the Central Bank to aggressively buy foreign currency, as exporters will not be too happy.

The drama in the Strait of Hormuz

A more dramatic option is Iran's action to completely block the Strait of Hormuz. The possibility of such a step was announced on June 14, in particular, by Iranian MP Ismail Kousari. According to him, Tehran is exploring this possibility. It is difficult to judge the technical side of the issue, but if this task is completed, then the global oil market will face real upheavals. If Saudi Arabia can redirect part of its own production through the East—West oil pipeline, then countries like Qatar, Iraq and Kuwait are deprived of such an opportunity.

"In the case of a complete and prolonged blockade of the Strait of Hormuz, we can talk about the redistribution of about 17-20 million barrels per day, which is about 20-30% of global sea oil transit and about 20% of global consumption," Timonin said. - Alternative routes and reserve capacities can only compensate for about 4 million barrels per day, so the deficit may amount to about 10-15 million barrels per day with a long-term blockade. This will lead to an extremely severe shortage in the global market. In this regard, such a shortage can push prices significantly above the $100 per barrel mark.

Such effects could send the global economy into recession, especially if events in the Middle East intensify the tariff war crisis, which is still far from over.