The Middle East conflict - Palestine versus Israel now, Iraq to come - creates serious risks for growth and financial stability. To understand the severity of these risks, let's work backwards from what is unlikely to happen.
All grandstanding notwithstanding, neither Iraq nor Iran will mount an effective oil embargo on the US. First, their commitment to oppose America does not include a pre-emptive sacrificing of essential oil sales that keep their run-down economies churning. Both countries recognize that if they refuse to sell America oil, other countries (Russia and Mexico) will take up the slack. So an Iran/Iraq oil embargo is bound to be ineffective. All that will happen is that they will lose money.
Even Saddam is smart enough to avoid this trap, so he and Iran's ayatollahs will posture and grandstand and thus move oil prices up a bit. Nothing more serious than that. To their Arab spectators, grandstanding is almost as good a proof of leadership as actually doing something.
But the real risk to oil is open hostilities or sabotage of oil installations. What matters here are not oilfields, but pipelines, refineries, and oil ports - they influence spot price because they govern the immediate availability of oil. As we saw in the Gulf War, the risk of damage to oil refineries raised spot prices dramatically: $40 back then. This time around the price would certainly go higher because the risks including sabotage are much more widespread.
This would almost certainly happen if and when the US takes on Iraq. In principle Saudi Arabia could offset a price rise by hiking its production. But it is one thing for Saudi Arabia not to join an embargo, and it is another to undercut oil politics by flooding the market in a pro-US move. Saudi Arabia is unstable, so it will keep trying to straddle both sides. Use of America's vast strategic oil reserve will dampen world oil prices for a time, but when all is said and done, once hostilities with Iraq start, oil prices will shoot up.
When may any of this happen? America demands that Iraq meet three criteria - promoting regional stability, ending its pursuit of weapons of mass destruction, and ending suppression of its own people - to which Saddam will never assent. Saddam is, thus, doomed and it does not matter whether Europe cooperates with the US or not. The problem, as in 1991, is the absence of a suitable government to fill the vacuum, one acceptable to the region and to the US. That issue and the unresolved Palestine-Israel debacle are holding off immediate action. This means that oil prices will remain high (possibly higher) for some time to come.
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Consumers in the US, but also in Europe and Asia, will be hit by an oil shock. They will have less spending power, demand will fall and growth will slow, as during the Gulf War. A slowdown of the US and world economy, in turn, is bad news for asset markets and will put central banks in the awkward position to having to decide between fighting recession through easier money or fighting the inflation caused by rising oil prices by raising interest rates.
If tightening is the rule, say sayonara to a rising stock market. True, oil is far less important to the industrial economies nowadays than in the past, but an extra $10 dollars per barrel in costs is a huge shock that will hit hard.
Suppose all this happens, what will happen to the dollar? So far, the dollar remains strong relative to Europe--not very strong, a rate of $1.10 for the Euro was never an equilibrium rate--but it was sustained by US relative growth performance and by the image of a US as the world's economic superstar. The superstar role is enforced by military prowess but it becomes seriously damaged when it gets bogged down in worldwide disapproval, from greens, anti-globalizers and peaceniks, European cynicism, and the angry "Arab Street".
With an economy that will not better Europe in such adverse circumstances, and with a tarnished US image, the dollar will be at risk of a serious fall. The only thing that might hold the dollar at near to present levels is a bad economic performance in Europe. After all, blaming the US is predominantly a way of shifting light from Europe's failed leadership to another country's struggles for a safer world (including the continued existence of Israel) and a stronger world economy. After all, the problems that beset Mr. Schroeder, or Mr. Berlusconi, and Messieurs Chirac and Jospin, aren't the stuff that shapes the world.
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US President Donald Trump’s import tariffs have triggered a wave of retaliatory measures, setting off a trade war with key partners and raising fears of a global downturn. But while Trump’s protectionism and erratic policy shifts could have far-reaching implications, the greatest victim is likely to be the United States itself.
warns that the new administration’s protectionism resembles the strategy many developing countries once tried.
It took a pandemic and the threat of war to get Germany to dispense with the two taboos – against debt and monetary financing of budgets – that have strangled its governments for decades. Now, it must join the rest of Europe in offering a positive vision of self-sufficiency and an “anti-fascist economic policy.”
welcomes the apparent departure from two policy taboos that have strangled the country's investment.
The Middle East conflict - Palestine versus Israel now, Iraq to come - creates serious risks for growth and financial stability. To understand the severity of these risks, let's work backwards from what is unlikely to happen.
All grandstanding notwithstanding, neither Iraq nor Iran will mount an effective oil embargo on the US. First, their commitment to oppose America does not include a pre-emptive sacrificing of essential oil sales that keep their run-down economies churning. Both countries recognize that if they refuse to sell America oil, other countries (Russia and Mexico) will take up the slack. So an Iran/Iraq oil embargo is bound to be ineffective. All that will happen is that they will lose money.
Even Saddam is smart enough to avoid this trap, so he and Iran's ayatollahs will posture and grandstand and thus move oil prices up a bit. Nothing more serious than that. To their Arab spectators, grandstanding is almost as good a proof of leadership as actually doing something.
But the real risk to oil is open hostilities or sabotage of oil installations. What matters here are not oilfields, but pipelines, refineries, and oil ports - they influence spot price because they govern the immediate availability of oil. As we saw in the Gulf War, the risk of damage to oil refineries raised spot prices dramatically: $40 back then. This time around the price would certainly go higher because the risks including sabotage are much more widespread.
This would almost certainly happen if and when the US takes on Iraq. In principle Saudi Arabia could offset a price rise by hiking its production. But it is one thing for Saudi Arabia not to join an embargo, and it is another to undercut oil politics by flooding the market in a pro-US move. Saudi Arabia is unstable, so it will keep trying to straddle both sides. Use of America's vast strategic oil reserve will dampen world oil prices for a time, but when all is said and done, once hostilities with Iraq start, oil prices will shoot up.
When may any of this happen? America demands that Iraq meet three criteria - promoting regional stability, ending its pursuit of weapons of mass destruction, and ending suppression of its own people - to which Saddam will never assent. Saddam is, thus, doomed and it does not matter whether Europe cooperates with the US or not. The problem, as in 1991, is the absence of a suitable government to fill the vacuum, one acceptable to the region and to the US. That issue and the unresolved Palestine-Israel debacle are holding off immediate action. This means that oil prices will remain high (possibly higher) for some time to come.
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At a time of escalating global turmoil, there is an urgent need for incisive, informed analysis of the issues and questions driving the news – just what PS has always provided.
Subscribe to Digital or Digital Plus now to secure your discount.
Subscribe Now
Consumers in the US, but also in Europe and Asia, will be hit by an oil shock. They will have less spending power, demand will fall and growth will slow, as during the Gulf War. A slowdown of the US and world economy, in turn, is bad news for asset markets and will put central banks in the awkward position to having to decide between fighting recession through easier money or fighting the inflation caused by rising oil prices by raising interest rates.
If tightening is the rule, say sayonara to a rising stock market. True, oil is far less important to the industrial economies nowadays than in the past, but an extra $10 dollars per barrel in costs is a huge shock that will hit hard.
Suppose all this happens, what will happen to the dollar? So far, the dollar remains strong relative to Europe--not very strong, a rate of $1.10 for the Euro was never an equilibrium rate--but it was sustained by US relative growth performance and by the image of a US as the world's economic superstar. The superstar role is enforced by military prowess but it becomes seriously damaged when it gets bogged down in worldwide disapproval, from greens, anti-globalizers and peaceniks, European cynicism, and the angry "Arab Street".
With an economy that will not better Europe in such adverse circumstances, and with a tarnished US image, the dollar will be at risk of a serious fall. The only thing that might hold the dollar at near to present levels is a bad economic performance in Europe. After all, blaming the US is predominantly a way of shifting light from Europe's failed leadership to another country's struggles for a safer world (including the continued existence of Israel) and a stronger world economy. After all, the problems that beset Mr. Schroeder, or Mr. Berlusconi, and Messieurs Chirac and Jospin, aren't the stuff that shapes the world.