By Girish Linganna
New Delhi, Apr 15: The recent conflict between Israel and Iran is poised to have profound economic impacts globally, affecting everything from shipping costs to global oil supply and inflation. Here’s a breakdown of the potential economic consequences and the geopolitical backdrop fueling the situation:
Economic Impact
1. Increased Shipping Costs: The conflict heightens risks in key regions, driving up freight and insurance costs. Ships may be forced to take longer, alternative routes to avoid conflict zones, further increasing shipping expenses.
2. Potential Oil Supply Disruption: The Strait of Hormuz, a critical passage for about one-third (33%) of the world's oil production, could be blocked due to the conflict. This disruption could echo the effects of past oil crises. Additionally, there's a risk of the Suez Canal being targeted, which would further complicate global trade.
3. Impact on Israeli Exports: Known for its robust electronics sector, Israel might face disruptions in production and logistics, leading to shortages in global markets.
4. Global Inflation: As transportation of goods becomes more difficult and expensive, a surge in global inflation could follow, affecting economies worldwide.
5. Beneficiaries of the Conflict: While many sectors suffer, oil and insurance companies outside the immediate conflict zone may see increased profits from higher oil prices and insurance premiums. The arms industry might also experience a boost in demand for military equipment.
6. Potential for Regional Escalation: The scope of the conflict is currently unclear, but there is a real possibility it could expand to involve other Middle Eastern nations, including Lebanon, Iraq, Syria, Yemen, Jordan, Saudi Arabia, UAE, and Egypt.
Geopolitical Background
In international relations, this conflict is an example of asymmetric warfare across different zones of influence.
Iran's Influence:Iran supports various paramilitary groups across Yemen, Iraq, Lebanon, and Syria, such as the Houthis, Al Hashd al Shaab (including Kata'ib Hezbollah and Kata'ib Imam Ali), Hezbollah, and the Syrian army. These groups form the "axis of resistance," establishing a strategic corridor from Iran to Syria and Lebanon, pivotal for Iran’s strategic and economic goals.
Israel's Alliances: On the other side, Israel is supported by allies like Jordan, NATO, and the USA, with American bases in Iraq and Saudi Arabia. These alliances bolster Israel’s national security strategies, which include conducting preemptive strikes, as seen in the recent bombing of the Iranian consulate in Syria.
Iran's Response: Viewing the attack as aggression, Iran retaliated, highlighting the tense and complex dynamics in the region.
The intricate nature of these dynamics underscores the significant risk of escalation across the Middle East, necessitating close monitoring of the unfolding situation. The economic and geopolitical ramifications of this conflict could reverberate globally, impacting international trade and economic stability.
Strait of Hormuz Geography
The Strait of Hormuz is a vital sea passage connecting the Persian Gulf with the Gulf of Oman.
It is located between Iran to the north and the UAE and Oman's Musandam Peninsula to the south.
The strait is about 33 kilometers wide, with navigation lanes that are approximately 3 kilometers wide on each side.
This narrow waterway is crucial for oil transport from Gulf countries like Iraq, Qatar, Bahrain, the UAE, Kuwait, and Saudi Arabia to the Indian Ocean.
The Strait of Hormuz is the sole sea path for many oil-producing nations in the OPEC group, such as Saudi Arabia, Iran, the UAE, and Kuwait, all of which rely heavily on this route.
Qatar, the world's largest exporter of LPG (liquefied petroleum gas), also depends on this strait for its shipments.