Arab News Japan

TOKYO: Iran’s threat to close the Strait of Hormuz and disrupt oil and gas traffic could have a significant effect on the price of those commodities and the world economy, but the action would also affect Iran negatively and the rulers there are unlikely to follow through with their threat, according to analysts Oxford Economics (OE).

OE notes that Iran has threatened to close the Strait of Hormuz on numerous occasions with only limited effects on the price of oil. “Iran does not have the military power to enforce a complete blockade of the shipping route,” OE says, suggesting that Iran might take limited action in the Strait.

In a worst-case scenario, OE estimates that Iran could reduce shipping through the Strait by as much as 70 percent in the short term, but it says that defensive measures and rerouting oil shipments could limit the impact on global oil supply to only around 1 percent below normal.

However, the combination of reduced oil supply, higher shipping costs, plus a surge in the geopolitical risk premium could trigger a spike in oil prices, rising to $115 per barrel before falling back to $75 by mid-next year. OE says this, along with higher gas prices and supply-chain disruption, would lift inflation in the US to 5.5 percent and in the Eurozone to 3.5 percent.

Gas markets would be harder hit. Qatar supplies over 25 percent of Asia’s LNG and around 5 percent of Europe’s. If flows were disrupted, OE says Asian spot prices, which averaged $11.43 per MMBtu in May, could jump toward $20 per MMBtu.

“The shock would cause US GDP to flatline in H2, while the real income squeeze would likely result in Eurozone and Japan GDP contracting over the same period,” OE says. “World GDP would be 0.5 percent below baseline by early 2026. This would result in global GDP growth slowing to just 2.0 percent next year.”

OE says the Eurozone and Japan would also suffer higher inflation, with the squeeze on real incomes resulting in reduced consumer spending growth in the Eurozone and outright falls in Japan, enough to push both economies into recession later this year.

OE says action by Iran would harm its relations with China, which Iran may be loath to upset as the primary buyer of its sanctioned oil. Some estimates suggest over 80 percent of crude oil moving through the Strait is bound for Asia. Iran’s threats may backfire if its enemies attack its oil infrastructure.

OE concludes: “Overall, the risk that Iran will disrupt the flow of shipping through the Strait has clearly increased in the wake of the US attacks. But it’s unlikely that Iran has the appetite or ability to stage a full blockade. The US has said in the past that any attempt to do this would be seen as an act of war.”