How the Conflict Between Israel and Iran Could Spark a Global Recession

Commentaries on economics and technology.
March 17 2012 7:03 AM

The Fear Premium

Oil supplies are up, and demand is down. But the conflict between Israel and Iran threatens to cause another global recession.

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The next few weeks could bring a reduction in tensions, as the United States, France, Germany, the United Kingdom, China, and Russia go through another round of attempts to prevent Iran from developing nuclear weapons or the capacity to produce them. But if this attempt fails, as is likely, one cannot rule out the possibility that by summer Israel and the United States will agree that, sooner rather than later, force will have be used to stop Iran.

Indeed, while Israel and the United States still disagree on some points—Israel wants to strike this year, while the Obama administration is opposed to military action before facing the voters in November—the two sides are converging on aims and plans. Most importantly, the U.S. is now clearly rejecting containment (accepting a nuclear Iran and using a deterrence strategy). So, if sanctions and negotiations don’t credibly work, the U.S. (a country that doesn’t “bluff,” according to Obama) will have to act militarily against Iran. The U.S. is now providing bunker-buster bombs and refueling planes to Israel, while the two militaries are increasing joint military exercises in case an attack becomes necessary and unavoidable.

If the drums of war grow louder this summer, oil prices could rise in a way that will most likely cause a U,S, and global growth slowdown, and even an outright recession if a military conflict erupts and sends oil prices soaring.

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Moreover, broader geopolitical tensions in the Middle East are not fading and might intensify. Aside from deep uncertainty regarding the course of events in Egypt and Libya, now Syria is on the verge of civil war, and radical forces may get the upper hand in Yemen, undermining security in Saudi Arabia. There is still concern about political tensions rising in Bahrain and Saudi Arabia’s oil-rich Eastern Province, and potentially even in Kuwait and Jordan, all areas with substantial Shia populations or other restless groups.

Now that the U.S. has left Iraq, rising tensions between Shiite, Sunni, and Kurdish factions do not bode well for the country’s ability to boost oil production soon. There is also the ongoing Israel-Palestine conflict, tension between Israel and Turkey, and hot spots—particularly Afghanistan and Pakistan—in the wider neighborhood.

Oil is already well above $100 abarrel despite weak economic growth in advanced countries and many emerging markets. The fear premium might push prices significantly higher, even if no military conflict ultimately takes place and could trigger a global recession if one does.

This article comes from Project Syndicate.

Nouriel Roubini is chairman of Roubini Global Economics and professor of economics at New York University's Stern School of Business.

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