The development of the Middle East seems to be increasingly uncontrollable, and the possibility of Saudi Arabia and Iran entering a war is getting higher and higher. There is no doubt that a complete confrontation between the two countries will be a complete disaster for the region and the entire world. Once they start a war, international crude oil prices may soar to $200 a barrel.
Last week, Yemeni Houthi insurgents fired a missile at Saudi airport near Riyadh. Although the missile was intercepted, the Saudi military coalition against Yemeni insurgents said the attack was "a blatant military aggression of the Iranian regime and could be regarded as an act of war." According to Saudi Arabia's official media reports, Saudi Arabia reserves the "right to respond."
The war may lead to the blockade of oil export fortresses
, Iran and Saudi Arabia, two major OPEC oil-producing countries, are close to the Persian Gulf, and the amount of oil exported through the Strait of Hormuz accounts for 20% of the world's oil supply, thus connecting the Persian Gulf oil-producing zone with the global market. The narrowest part of the Strait of Hormuz is only 34 miles away, next to Iran to the north and Oman to the south. If a war breaks out between Saudi Arabia and Iran, the fortress will easily be blocked.
In fact, shipping may stop without waiting for the ship to be damaged. If insurance companies believe tankers in the area are about to be attacked, they may suspend insurance or charge high insurance rates. In this case, the owner can choose to wait until the hostilities are over before leaving the ship. This will be enough to completely interrupt the crude oil supply.
Historically, the economic recession brought about by blockades
The impact of such blockades on the global economy will be severe and direct. For example, the Suez crisis in 1957 reduced oil production in the market by 10%. Within a month, the United States and Europe faced an economic recession, which lasted for more than half a year.
In 1973, the Arab-Israel war broke out. OPEC announced an oil embargo in order to combat opponents Israel and countries that support Israel. This has led to a long line of gas stations and oil prices have quadrupled. Although global oil production remains stable every year, Persian Gulf's exports to the United States and Japan fell by 1.2 million barrels, accounting for about 7% of the total U.S. consumption. The oil crisis has put the United States in a two-year recession.
The impact of blockade on the world today
So, if Saudi Arabia and Iran's hostility lead to the continued suspension of Persian Gulf exports, a serious and rapid global economic recession will also occur.
Just like in 1973, the United States' current imports from the Persian Gulf still account for 8% of consumption, losing this oil is enough to reduce the U.S. GDP by 10% between 1973 and 1975. While the United States can import from like Nigeria, Angola and even Brazil and Colombia, China and other importers will try to bid higher than the United States. Overall, total U.S. imports could fall by 15%, twice that of 1957-1973, enough to put the U.S. in a severe economic recession that lasted for several years.
And those countries that do not produce oil will suffer the most, especially in Europe and East Asia, especially in Japan and South Korea.
Finally, given the history of cooperation between North Korea and Iran on missile programs, the threat of Iranian missile attacks may exacerbate tensions between the United States and North Korea. Preventing Iran from obtaining nuclear weapons could become a top priority in the conflict and lead to a rapid escalation of the Korean Peninsula crisis.
Facing conflict, possible responses
For investors, if the event can be reasonably hedged, the best hedging will be long positions of western hemisphere operators such as oil futures, US shale operators and land rigs, as well as Canadian oil sands producer Suncor and Brazilian oil giant Petrobras.
However, hedging cannot replace conflict mediation. The inflammatory remarks of the U.S. government in its diplomacy on the Middle East are obviously not the time. The United States must act as a global policeman like it did after World War II. The United States must ease tensions in the Middle East, reaffirm the United States' insistence on a fair and principled foreign policy, and to resolve conflicts through negotiations rather than reckless use of force. If the United States does not do this, it will be a complete disaster not only for the region, but also for the entire world.
