Military strike on Iran would have global economic consequences
Any military action against Iran would send seismic shocks through global energy markets at a time when the price of oil is already at record highs.
If these challenges are daunting for the United States, imagine what they would be like for Israel. Even if the Israelis could mount a successful operation against Iran’s nuclear program—which is open to debate—they cannot afford to bear the tremendous political cost of triggering a worldwide recession. This may explain why the Israelis, who are most threatened by the Iranian nuclear program, have been so publicly strident about it; they want other powers to deal with it.
Paradoxically, by removing the military option on Iran, the economic crisis provides a valuable window in which to build an international consensus on how to respond to the country’s obstreperous leadership, and perhaps apply more effective targeted sanctions against it.
Despite Washington’s saber rattling, the threat of reverting back into recession makes one thing clear: when it comes to Iran, all options are not on the table.
There are severe costs to the United States. When countries undertake actions that carry great uncertainty and risk, two questions need to be asked. First, can it be done? Second, what will it cost? The fact that Israel faces an existential threat may understandably lead it to downplay the costs to others, particularly to the United States. After all, it's easy enough for Americans to assume, living thousands of miles away, that Iran is a rational actor and would never use a nuclear weapon against Israel because of the expectation of its own obliteration at the hands of the Israelis or the United States. Israelis, of course, maintain that the threat of retaliation is not an acceptable deterrent and will look to their own interests first. But let's look at what an Israeli strike might do to U.S. interests and an economy still in recession. Even if the Iranians could only temporarily block shipping in the Strait of Hormuz (through which 40 percent of all oil sails), the price of oil would spike exponentially, further undermining and sabotaging world markets -- and doing tremendous damage to the fragile economic recovery in the United States. These economic and financial uncertainties could be truly global and catastrophic. At the same time, the Iranians would certainly try to turn up the heat against U.S. forces in Afghanistan and those remaining in Iraq, further compounding an already tenuous security situation in both countries. Together with a resurgent al Qaeda in Iraq (a Sunni threat), U.S. forces would be faced with a Shiite one as well. At the precise moment U.S. forces are committed to leaving Iraq, they could get sucked back into staying. Iran might well lash out at foes and perceived foes across the region, including in the Persian Gulf, particularly in a place like Bahrain. The Iranian capacity to strike the continental United State may be limited, but the capacity to wage a clandestine war against U.S. and Israeli interests across the Middle East is far more formidable.
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First, any military action against Iran would send seismic shocks through global energy markets at a time when the price of oil is already at record highs. Since Iran relies heavily on the income derived from oil exports, it is unlikely that it would withhold petroleum from global markets. Iran may, however, threaten to disrupt the flow of traffic through the Strait of Hormuz or sponsor attacks on key oil infrastructure on the territory of America's Gulf allies. Such actions could hurt the US economy and potentially bolster Iranian revenue by raising the price of oil. While it is true that the world market would eventually adjust to such actions, as James Fallows has noted, that is a bit like saying eventually the US stock market adjusted to the Great Depression.
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As an obvious consequence of the instability resulting from a U.S. strike, the price of oil almost certainly will spike. The impact will depend on how high and how long. The longer the conflict goes, the higher the price. A former Kuwaiti oil minister privately suggested a plateau of $125 per barrel. Confidential analysis by a major European bank suggests it would level off at $130, and a very conservative estimate would be over $200. With prices surging to this level, third order consequences become apparent The most obvious would be a global synchronized recession, intensified by the existing U.S. trade and fiscal imbalances. Another political consequence would be that oil exporting countries outside the region woul enjoy significant surges in revenue from higher prices. As a result, countries such as Venezuela and Russia would enjoy expanded influence while the West would be reeling from recession.
The Obama administration’s deadline for Iran to enter discussions on the nuclear issue has passed. As the White House and its allies weigh new policy options, Washington is still running with the old line that “all options are on the table.” Not really. Amid a global recession and double-digit unemployment, bombing Iran’s nuclear installations is out of the question.
Any attack on Iran would drive oil prices up dramatically from already high levels, and risk sending the fragile global economy back into financial crisis. If oil reached $150 per barrel, as it did in the summer of 2008, the cost of heating bills would soar, and the price of gasoline in the United States could once again climb above $4 a gallon. The effect on consumer spending—on which the recovery depends—would be severe. Based on average national oil consumption and prices in 2009, an oil spike lasting six months would equate to a tax of over $3,000 for a family of four.
An attack on Iran would provide the embattled regime in Tehran an occasion to rally its population and lash out in every way it can. Though the Iranians would be unable to close the Straits of Hormuz, or even do great damage to the U.S. fleet or the Saudi oil apparatus, insurance rates for shipping would skyrocket. The sense of uncertainty about future supply would roil markets and also push oil prices through the roof. As a result, the greatest beneficiaries of an attack on Iran would be oil producers, including irresponsible ones like Hugo Chavez, and ironically the Iranian mullahs themselves, who would use the extra income to tighten their grip on power.
The Iranians would likely also encourage their allies in Lebanon and Palestine, Hezbollah and Hamas, to attack Israel and kick off a wave of terrorism against American interests around the globe. All of this will contribute to an atmosphere of chaos and insecurity.