How the Iran war is sending economic shockwaves across the world — and why India is watching closely

The Iran war is already sending shockwaves through the global economy, disrupting oil markets, shipping routes and fertilizer supply chains. Oil prices rose sharply, shipping traffic in and out of the Persian Gulf has slowed dramatically, and a number of Asian governments are now assessing how much this new conflict involving the US, Israel, and Iran will ultimately cost their economies.

Countries such as India have a great deal riding on the answer. The current crisis between the US, Israel, and Iran is quickly becoming an economic event that has implications well beyond the Middle East. We are seeing rising energy prices, considerable pressure on fertiliser supply chains, and international markets responding to the increasing likelihood that one of the most vital shipping lanes in the world will continue to be unstable.

This latest conflict also reaffirms one of the simple realities of the global economy today: that when energy supply chain choke points become battlegrounds, the effects of those battles extend far beyond the region where fighting first begins.

The Strait of Hormuz: the world’s most fragile energy artery

At the centre of this volatility lies the Strait of Hormuz—the world’s most fragile energy lifeline. The Strait of Hormuz is the narrow passage from the Persian Gulf to the international shipping lanes.

In normal times, approximately twenty million barrels of oil (about 1/5th of total world supply) move through this corridor every day. It is also a vital transportation corridor for liquefied natural gas and fertilizers that are exported from the Gulf.

Shipping traffic through the Strait has slowed since the beginning of the conflict because of increased insurance premiums and reevaluation of risk by tanker operators. Even minor disruptions in shipping have created instability in global energy markets.

The strait also contains a substantial percentage of the global fertilizer exports, including ammonia, urea, and phosphates. Disruption of this flow could negatively impact agricultural supply chains for those countries that rely heavily on imported fertilizers.

How Energy Markets Respond to Geopolitical Risk

Following the missile strikes, crude oil prices increased rapidly. The price of Brent crude increased from less than $70/bbl on February 20 to nearly $120/bbl at the beginning of March (the highest level seen since the initial onset of the Ukraine war). Brent crude prices have since stabilized around $90/bbl until recently, but still have been volatile.

The large price increase in crude oil reflects fear that the current conflict may impede the flow of energy from the Gulf — one of the most significant oil production regions in the world.

The Middle East has seen many wars that caused similar reactions in the markets. As oil is the backbone of global transportation, manufacturing and electricity generation; any sudden disruptions to the supply of oil will tend to flow quickly through all markets in the world’s economy.

Why Asia — and India — are especially exposed

Although the geographical focus of conflict is the Middle East, the impact (economic) will be mostly directed towards Asia.

India, China, Japan and South Korea represent almost 75 percent of all oil shipments out of the Gulf region, so they are particularly vulnerable to any disruption of supplies coming from that region.

India would appear to be especially vulnerable. It imports more than 85 percent of its crude oil needs, much of that coming from West Asia. A significant portion of that oil is transported through the Strait of Hormuz.

When global oil prices increase sharply, the impact on India will be visible through several different types of economic impact.

Increased energy costs will increase import bills for India, which will lead to increased pressure on the rupee and increased widening of the current account deficit. Increasing fuel prices will also enter inflation and lead to higher transportation costs as well as higher food prices.

Small changes in the price of oil will have a significant macroeconomic impact. It is estimated by analysts that every $10 increase in crude oil prices results in billions of dollars in additional annual costs for India. The latest energy crisis has already had far-reaching effects within and across many industries.

Businesses to feel the impact

The airline industry has been impacted first by this crisis as jet fuel is primarily a derivative of crude oil, thus causing airlines to make airfare prices higher when they’re forced to pay higher fuel prices.

Logistics companies also deal with these pressures as shipping costs and freight costs go up along with the increased cost of fuel and transportation.

The fertiliser market may also be affected by this disruption as the majority of fertiliser exported out of the Gulf region passes through the Strait of Hormuz, meaning there may be shipping interruptions, affecting both supply and demand for agricultural commodities.

For farmers in developing nations, the use of fertiliser is one of the most important elements when determining crop yields and the price of food produced. In the event of sustained disruptions to the availability of fertiliser, this could have long-term implications for global food inflation.

ALSO READ: Why Yemen’s Houthi rebels have stayed out of the conflict — for now

A redistribution of economic power

As oil price increases occur, wealth is transferred from energy-importing nations to those that produce energy.

This energy crisis has already begun to result in this type of redistribution of income, specifically to countries like Norway, Russia and Canada, who all produce high volumes of oil and natural gas and thus have benefitted greatly from the increase in prices for energy commodities across the globe.

Energy-adverse economies in Asia and Europe absorb the higher costs of energy supply (or fund), including imports.

These energy-importing economies (including India) create difficult challenges for extended disruptions in the energy supply.

When distant wars reach domestic economies

While the Gulf War missiles fired in the Middle East may impact military strategy in that region, the impact on the geopolitical landscape will already be much broader than simply where the missiles are originating from.hh

Energy prices, shipping prices and food production costs are all responding negatively to the uncertainty of the current Conflict. In the household sector, this will be felt via higher fuel costs, more expensive shipping, and possibly higher food costs.

To the citizens of India, the War in Iraq will be much more than a distant political crisis; it is the reminder that geographically distant conflicts can greatly affect an economy that is interconnected and globalised.

FOR MORE: https://civiclens.in/category/international-news/