Oxford, Jun 19 (The Conversation) The surprise military action by Israel against Iran, an essential player in the global oil market, could further disrupt fragile economic growth worldwide and challenge central banks already grappling with unsettling market dynamics.
Iran, a significant oil exporter, ships up to 2 million barrels of oil and refined products daily. Under enduring sanctions, most of this oil is directed to China at reduced prices. A sudden reduction in Iranian exports, which represent about 2% of global oil supply, would typically spark alarm. However, OPEC is currently reversing production cuts made during the early stages of the COVID-19 pandemic.
This strategic move leaves OPEC with a substantial spare production capacity of at least 4 million barrels per day, primarily held by Saudi Arabia and the UAE. The International Energy Agency (IEA) also maintains emergency reserves exceeding 1.2 billion barrels across OECD nations, ready for deployment if necessary. China holds substantial reserves as well, although the separation between its commercial and strategic stocks is ambiguous.
Additionally, around 40 million barrels of Iranian oil remain aboard ships anchored near China, unsold due to waning industrial demand and the rise of electric vehicles which are curbing petrol consumption. In May, China's refinery throughput declined by 1.8% compared to the previous year, with little sign of a quick recovery. Moreover, the IEA anticipates global oil production to surpass 1.8 mbd, exceeding initial projections of 0.72 mbd, resulting in a significant supply surplus over demand.
China has been a savvy buyer, abstaining from purchasing surplus Iranian oil supplies when prices were USD 65 a barrel earlier this year. Whether China purchases at USD 75 or higher may signal how seriously it regards the Middle East tensions. Meanwhile, other Asian importers have been swift to secure prompt shipments from West Africa and are considering U.S. sources.
Despite the surplus capacity and stagnant demand, the oil market's response has been more restrained than anticipated. Prices briefly surged by USD 10 but have since moderated. The market is evaluating whether hostilities will escalate, in which case the impact on energy prices and inflation could become more pronounced.
A Conflict of Convenience It remains somewhat unclear why Israeli Prime Minister Benjamin Netanyahu chose this moment to attack Iran, particularly amid ongoing peace talks between Iran and the United States.
Former Israeli leader Ehud Barak recently acknowledged that even a full-scale assault would delay Iran's nuclear ambitions by mere weeks or months, with U.S. backing. As such, diplomacy may still be the more effective path, a rationale behind the Iran nuclear deal brokered under former U.S. President Barack Obama, which was later dismantled by Donald Trump under pressure from Netanyahu.
Netanyahu's ultimate goal could be political survival, diverting attention from the humanitarian crisis in Gaza. If Iran feels cornered enough, it may retaliate by closing the Strait of Hormuz—a crucial chokepoint for up to 20 million barrels of oil daily. Some of this oil can be rerouted through alternative supply lines, such as the large (6 mbd) Saudi East-West pipeline leading to the Red Sea.
The UAE pipeline also bypasses the Strait of Hormuz, reaching the port of Fujairah in the Gulf of Oman. Nevertheless, increased risks and higher shipping costs would likely drive up fuel prices considerably. Insurance costs for ships navigating the Strait of Hormuz have soared 60% since the conflict's onset, potentially causing broader economic repercussions.
The World Bank recently reduced its global growth forecast to 2.3% for 2025, nearly half a percentage point below previous projections. While a global recession isn't currently anticipated, the organization warned that growth this decade could be the slowest since the 1960s.
A significant factor is Trump's tariff policy, which has frayed international trade, diminished efficiency, and effectively taxed consumers in the U.S. and elsewhere. Inflation concerns have led to increased long-term bond yields. Expectations of higher inflation and rising bond yields constrain central banks from stimulating the economy by lowering interest rates—a key tool for the U.S. Federal Reserve to influence borrowing costs and economic activity.
Despite a recent U.S.-UK trade agreement, a 10% tariff remains on UK imports, with steel still at 25%. The UK's economic growth had already turned negative before the conflict, with households now facing the burden of higher petrol prices, sluggish wage growth, and rising unemployment.
The Middle East conflict has yet to ignite a global oil crisis but certainly won't improve the cost of living for anyone.
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