No Matter Who Wins the Iran War, the Global Economy Is Losing |
For all the uncertainty about what will happen next on the military and diplomatic front in the Iran war, there is certainty about what has already happened on the economic front. And it is not good.
The world has seen a spike in oil prices that has been moderated so far by large drawdowns in global oil reserves. In addition, the most vulnerable populations of the Global South are suffering ever-increasing distress, while most of the world has been experiencing rising inflationary pressures and increasing interest rates on government bonds. And even if the US stock market appears relatively unperturbed, a version of this unpleasant mix has also hit the United States.
Global oil prices are much higher than they were before the war, with the financial market benchmark price of Brent crude late last week (down to $91 on weekend news of a possible deal), well above the $60 per barrel of early January. That said, crude prices have been relatively stable within a broad range over the last two months despite a dramatic drop in energy shipments out of the Persian Gulf since the war began.
According to the International Energy Agency (IEA), as of May 13, the cumulative shortfall in global oil deliveries from the Gulf was roughly 1 billion barrels. This shortfall has been absorbed by reduced oil demand (a consequence of higher prices); increased production outside the Gulf; and by a drop in global oil inventories of roughly 250 million barrels, as these were released to hold down prices in the absence of new production from the Gulf coming to the market. However IEA head Fatih Birol warned last week that inventories were dropping at an unsustainable pace, particularly with summer driving season approaching in the Northern Hemisphere.
For all that US energy exporters might benefit from higher global oil prices, US consumers do not.
The biggest shock from the higher cost (and outright shortage) of fuel, petrochemicals, and fertilizers is being felt by the poorest in the Global South. A recent story in The New York Times described how the price for transporting corn into refugee camps in Somalia had doubled or even tripled, as had the price of water at diesel-powered public tubewells. Meanwhile, protests this week in Kenya against fuel price hikes have led to four deaths, and political and financial stresses are mounting across the continent.
In India, sharp jumps in the price of Liquid Petroleum Gas have hit urban households hard, particularly those whose breadwinners work in small-scale industrial establishments. Many such enterprises rely on LPG as fuel and have shut down, displacing a workforce composed of recent migrants from the countryside. And because informal migrant workers in the city do not have access to India’s price-controlled public distribution systems, they have been forced to purchase cooking fuel on the black market at exorbitant rates. The combination has sparked fears of a repeat of a mass return to the countryside, as happened in the Covid-19 summer of 2020.
Stories like these abound across the Global South. A report from the World Food Program (WFP) two months ago (when the war was two weeks old) projected that 45 million more people could be thrust into acute hunger if the war persisted. And a panel of global officials had already warned the world at the International Monetary Fund meetings in Washington in mid-April that even an immediate cessation of the war would require at least two months before global shipping approached a semblance of normalcy.
Weakness in the real economy of many developing countries has been compounded by financial pressures in the form of larger trade deficits driven by the jump in oil prices, higher inflation, depreciating currencies, drawdowns in central bank reserves, and the threat of central bank rate hikes to keep inflation in check even if the economy is weakening.
In the face of such pressures, many countries were forced to sell foreign exchange or gold reserves to defend their currencies from further depreciation. According to Bloomberg, losses in the Philippines amounted to 8.1% of all reserves, in India to 5.1%, and in Indonesia to 3.8%. India has also imposed stiff tariffs and other restrictions on gold imports, and Prime Minister Narendra Modi has urged Indians to avoid “unnecessary foreign travel,” in additional efforts to limit further pressure on the Rupee from non-energy imports or tourism. And Malawi is reportedly selling not just gold reserves but also semi-processed gold bars bought from local miners.
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