By Michael Burke
The main cost of the Iran War will be in human death toll. There is also the question of the national sovereignty of Iran, as the recent destruction of nations such as Syria, Iraq and Libya testifies.
In all cases the costs will be far-reaching and will mount the longer the attacks from the US, Israel and their allies continue, Britain chief among them. The same is true of the global economic and social costs of the war, which we already know will be considerable.
The supply of oil and of liquified natural gas (LNG) has been severely restricted through the Straits of Hormuz. So too has the passage of other essentials such as food and fertilisers. But there has also been structural damage to the supply of energy products, following the attacks on refining and port facilities across the region, both offensive attacks and the retaliatory ones.
The extent of this structural damage cannot be known until the war is ended. But it is possible to identify some of the parameters of the economic consequences that lie ahead.
Economic impact
Before the US launched its war, along with Israel, the price of the Brent crude benchmark was under $70 a barrel. At the time of writing it is $115/bbl and has traded as high as $120/bbl. An array of oil-based products has risen between 40% to 50% from a year ago, while gas prices are currently generally 90% higher than a year ago.
Globally, the net oil importers require approximately 40 million barrels of oil a day (almost a quarter of which normally passes through the Straits of Hormuz). That means their daily cost of oil consumption alone has risen from under $3 billion per day to over $4 billion.
But that is only part of the picture. All consumers of oil products, whether importers or not, are affected by the world price of oil, even if the direct impact is often mediated by taxes, subsidies and long-term supply contracts.
Global oil consumption is a little over 100 million barrels per day, implying that the total world cost of the consumption rises from $7 billion per day to well over $10 billion per day. Coincidentally, recent daily expenditure on gas consumption amounts to almost exactly the same, at around $10 billion, although the increase in costs has been greater, closer to $4.5 billion per day, rather than the $3 billion per day rise on outlays on oil.
As natural gas prices make up about 70% of the cost of fertilisers, the impact on these products has been considerable. Food production is already under pressure worldwide. There are also widespread reports of perishable food products rotting on ships that cannot pass through the Strait. An additional factor arises from reports that the cost of shipping insurance has risen from 0.25% of the vessel’s value to 7.5%.
Indirect consequences
The widespread use of fossil fuel products in both the production and distribution of many other commodities means that changes in price have a very large effect on other sectors of the economy. A severe shortage of supply will limit both production and distribution for many sectors.
The International Monetary Fund (IMF) estimates that every 10% rise in the oil price adds 0.4% to global inflation and reduces world GDP growth by between 0.1% and 0.2%. Even though the US is now an oil exporter, the official assessment from the US central bank is broadly similar in its impact on the US economy.
In Britain, the Bank of England’s rule-of-thumb on the effects of an oil price shock are completely in line with this assessment, although both the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) suggest that Britain is going to be one of the worst-hit of the OECD member countries among the advanced industrialised nations.
This is because of two effects. One is the very high levels of energy imports in the British economy. The other is the peculiar system of energy pricing in this country, which regulates the price of all wholesale energy at the cost of the most expensive energy, which is usually gas.
It is this way that the market is structured (effectively at a permanent subsidy to gas producers) that makes nonsense of all the claims the reopening depleted North Sea fields will solve the energy crisis here. These fields have been closed because declining stocks mean that the remaining fossil fuels are extremely expensive to tap. An increase in output from this source would significantly increase the price of energy in this country.
But the greatest dislocation to the world economy is certain to be felt in large parts of the Global South. In many countries, short-time working and energy rationing has already been put in place. The level of strategic energy reserves is often very limited or even close to zero. Soaring prices mean that some countries will simply be forced out of the energy market altogether.
In general, the economic effects from the attack on Iran will be very negative, even if the armed conflict ended tomorrow. The longer the conflict lasts, it becomes more likely that economic slump, surging inflation and outright shortages of essentials including food will be the norm.
The world economy is both more industrialised (and energy-dependent) than it was during the 1970s oil price shock and international trade is much bigger part of the world economy. Trade now accounts for about 60% of world GDP, compared to 25% in the 1970s.
The 1970s oil price shock was also preceded by the long boom following the end of World War II. Now, it arises after a prolong period of weak growth and high prices since the Global Financial Crash in 2007-08. As a result, the misery created could be very severe.
Of course, in all crises, the rich and powerful are somewhat insulated from the effects. It is workers and the poor who bear the brunt. As we have recently seen in the Covid crisis and the Ukraine war, energy companies, banks, food retailers and landlords are completely unscrupulous in profiteering even where there own costs are largely unaffected.
Government finances will also come under pressure when they are already weak. There will be a clamour to cut welfare, public spending and public sector pay to offset, although this will not be applied to military spending. It is the rampaging of the US, which seems to have declared war on half the world, which got us into this mess.
The question arises, why does the US believe that this is all a price worth paying? Even at the most self-interested level, the war effect on US gas prices is going to be extremely negative for the Republican party in the US mid-term elections in November.
Trump is operating strategically in the interests of US capital as a whole, and he has backing for his aggression. He is attempting to recoup militarily what has been lost economically, above all to China. The US is no longer the world’s sole economic superpower, but has far greater conventional military firepower than the rest of the world combined. The war in Iran is now the centrepiece of a global effort to reassert US global dominance on all fronts. As a result, this war, or other wars are very likely over the next period.
There could be a response that alleviates some of the worst effects of Trump’s forever wars. Radical measures to control prices, to direct investment and to push for renewable energy will be needed. The alternative is that workers and the poor globally will be left bearing the significant costs of yet another illegal war.
An earlier version of this piece appeared in the Morning Star here .
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