The world economy is facing a significant threat from the ongoing conflict in the Middle East, with the potential for a prolonged energy crisis looming large. The Organization for Economic Cooperation and Development (OECD) has warned that a sustained disruption of energy supplies from the region could have severe consequences for global growth, inflation, and employment.
The Strait of Hormuza critical chokepoint for global energy supplies, has seen a dramatic reduction in traffic due to the conflict. This has led to a significant disruption in the supply of crude oilfuel productsand natural gaswith about a fifth of the world’s supplies affected. The OECD’s report highlights the vulnerability of Asian economies and poorer countries that rely heavily on these energy sources.
The Economic Fallout of the Iran War
The OECD’s report presents two scenarios: a prolonged disruption and a time-limited disruption. In the prolonged disruption scenario, global growth is expected to slow down significantly, from 3.4% in the previous year to 2.1% in the current year and 1.8% in 2027. This could push some economies into or close to recession. In contrast, a time-limited disruption could see growth slowing to 2.8% this year, with a rebound to 3.1% next year.
Mathias CormannOECD Secretary-General, emphasized the need for targeted government spending to alleviate energy costs, particularly for those most in need. He cautioned against excessive government debt and stressed the importance of preserving incentives to save energy.
The Nuclear Dilemma
The conflict has also raised concerns about Iran’s nuclear ambitions. The International Atomic Energy Agency (IAEA) has warned about the increased risk of Iran covertly pursuing nuclear weapons. The agency’s report highlights the challenges in verifying the status of Iran’s nuclear material, which includes a large inventory of near-bomb-grade uranium.
The IAEA’s report underscores the new nuclear dilemmas created by the conflict. The longer the material remains outside of IAEA safeguards, the higher the risks grow that it could be diverted for non-peaceful uses. This has raised concerns about the path to a lasting nuclear accord and the potential for further instability in the region.
The Energy Market Response
The energy market has responded to the conflict with significant volatility. Oil prices have seen a sharp increase, with trading around $95.87–$96.50 per barrel. This surge in prices has been driven by a large draw in the American Petroleum Institute report and the disruption of supplies through the Strait of Hormuz.
Despite the challenges, there are signs of resilience in the energy market. Ship transits through the Strait of Hormuz have shown modest improvement, with vessels successfully exiting the waterway this week. The U.S. military has been providing support to commercial shipping, using lower-profile methods to avoid overt confrontations.
The conflict has also spurred long-term developments in the energy sector. The UAE is accelerating the construction of a new refined products pipeline to Fujairah on the Gulf of Oman. This pipeline, along with the existing crude West-East line, will allow more barrels to bypass the troubled Strait of Hormuz, enhancing supply security for the region.
As the world grapples with the economic and geopolitical implications of the Iran war, the focus remains on finding solutions to mitigate the impact on global growth, energy prices, and employment. The OECD’s report serves as a stark reminder of the interconnected nature of the global economy and the far-reaching consequences of regional conflicts.
