Of course, the strait could also be closed as a direct result of military hostilities, for example, by Iran.
The impact of such a closure on the global economy would certainly be severe as well as immediate. For example, the Suez Crisis of 1957 saw 10 percent of the planet’s oil production taken off the market. Within a month, the U.S. as well as Europe were facing a recession which would certainly last the better part of a year.
In 1973, the Arab-Israeli War as well as resulting Arab OPEC embargo would certainly bring long lines to gas stations as the oil cost quadrupled. On an annual basis, global oil production held steady, nevertheless Persian Gulf exports to the U.S. fell by 1.2 million barrels / day, or about 7 percent of total U.S. consumption. This specific oil shock would certainly plunge the U.S. into a recession which lasted For just two years.
inside event of a Saudi-Iranian hostilities lead to a sustained outage of Persian Gulf exports, a severe as well as prompt global recession will follow similarly.
Much as in 1973, U.S. imports by the Persian Gulf still amount to 8 percent of consumption, the loss of which was sufficient to knock 10 percent by GDP by 1973 to 1975. However, China as well as additional importers would certainly seek to outbid the U.S. on its imports by countries like Nigeria, Angola as well as even Brazil as well as Columbia. In all, U.S. imports could fall by 15 percent of total consumption–twice the drop by 1957 to 1973 as well as sufficient to plunge the U.S. into a deep recession lasting years.
On the additional hand, U.S. import dependence has fallen dramatically since the start of the shale revolution. Even as the U.S. coastal regions would certainly suffer by high oil prices, boom times would certainly return to Louisiana, Texas as well as on up to North Dakota as well as Canada’s Alberta province. A loss of 20 percent of the planet’s oil supply would certainly push oil prices into the $0 / barrel range. The shale sector would certainly see its glory days.
Those countries without material oil production would certainly suffer the most, notably Europe as well as East Asia, in particular Japan as well as South Korea.
China’s situation would certainly be dire. inside last few years, Chinese import dependence has become acute. Oil imports cover more than three-quarters of total Chinese consumption, as well as half of China’s imports originate inside Persian Gulf.
The closure of the Strait of Hormuz would certainly not only put China into recession, nevertheless given the high degree of financialization of the economy, could create a wider societal as well as political crisis. The reaction of the Chinese government will be difficult to anticipate, nevertheless China would certainly certainly bring maximal pressure on the U.S. as well as Persian Gulf countries to end the conflict, by whatever means. The ultimate takeaway for China would certainly be the necessity to build, at all speed, a global military as well as diplomatic presence capable of projecting force to influence events inside Middle East as well as, if necessary, to displace the U.S. inside region.
Finally, given the history of cooperation between North Korea as well as Iran on missile programs, the threat of missile strikes by Iran could exacerbate tensions between the U.S. as well as North Korea. Preventing Iran by obtaining a nuclear weapon could become the absolute priority inside conflict as well as lead to a rapid escalation of the crisis on the Korean Peninsula.
For investors, the best hedge, if events can be reasonably hedged at all, would certainly be long positions in oil futures, U.S. shale operators as well as land drillers, as well as western hemisphere operators like Canadian oil sands producer Suncor as well as Brazilian oil major Petrobras.
However, hedging will be no substitute for conflict mediation. The current U.S. administration has not shied by using inflammatory rhetoric as well as exploring novel approaches to Middle East diplomacy. today will be not in which time for in which. The U.S. must act as the global policeman, as the idea has since World War II. The country must calm tensions inside Middle East as well as reassert U.S. commitment to a fair as well as principled diplomacy which seeks to resolve conflicts through negotiation, not reckless force. If the U.S. fails to do so, the result will be an unmitigated disaster, not only for the region, nevertheless for all of us.
Commentary by Steven Kopits, managing director, Princeton Energy Advisors.
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