There are two layers, at least, to the damage from the war on Iran. One is the volatility injected into financial markets. The other, with some overlaps, is the longer term, potentially structural, way it will affect economies.
Sharemarkets have fallen sharply, with Wall Street down more than 5 per cent since the fighting began. At the same time, bond yields have spiked, and oil and gas prices have soared amid extreme volatility.
Donald Trumpā€™s latest TACO moment ā€“ giving Iran 48 hours before he committed a war crime by bombing its power generation, then backing down after Iran threatened to retaliate by attacking the regionā€™s energy infrastructure and desalination plants ā€“ led to sharemarkets rising in relief, bond yields edging down and the oil price falling back below $US100 a barrel.
While financial markets respond in real time to every development and erratic social media post from Trump (who seems to be making up strategy on a minute-by-minute basis), there are already very significant real-world effects from the war ā€“ effects that will become more substantial and prolonged the longer the conflict continues.
The 30 per cent-plus spike in oil prices, the massive surge in LNG prices ā€“ the spot price in Asia has more than doubled, and the European benchmark price, while it fell back overnight, has soared by more than 75 per cent ā€“ reflect what the International Energy Agencyā€™s Fatih Birol described this week as an energy shock equivalent to the combined effects of the two oil shocks of the 1970s and Russiaā€™s 2022 invasion of Ukraine.
While financial investors are speculating over whether the war ends in days or weeks, the flow-on effects from the damage to regional energy infrastructure will be measured in months, if not years.
The closure of the Strait of Hormuz has also interrupted the supply of fertilisers, petrochemicals and other oil derivatives that are vital to the functioning of modern economies.
Those commodities, and refined products such as jet fuel (whose price has more than doubled) and diesel, are not just experiencing massive price increases but ā€“ and this is probably longer lasting and more consequential ā€“ truncated supply.
There are countries that will soon run out of oil, gas and transport fuels, and others whose food production will fall.
Pakistan, which relies on the Persian Gulf for more than 80 per cent of its energy needs, is, for instance, talking about a four-day week to conserve fuel.
More than 60 per cent of Japanā€™s oil imports are sourced from the Persian Gulf, and 60 per cent are shipped via the strait.
South Korea gets more than 50 per cent of its oil from the Persian Gulf, and India about half of its requirements.
Smaller economies in South-East Asia, and others such as Sri Lanka and the Seychelles, are also almost totally dependent on energy imports.
Meanwhile, sub-Saharan economies and those in South Asia face a food crisis because of the warā€™s impact on fertiliser prices and availability.
While financial investors are speculating over whether the war ends in days or weeks (or at least until Trump, not for the first time, declares it over), the flow-on effects from the damage to regional energy infrastructure will be measured in months, if not years.
The IEA says more than 40 energy assets in nine countries in the region have been severely, or very severely, damaged.
Qatarā€™s giant Ras Laffan LNG complex, which produces about 20 per cent of the worldā€™s LNG, was hit by a missile attack that the country says will reduce its export capacity by 17 per cent ā€“ about 3.5 per cent of the worldā€™s supply. According to Qatar, it will take up to five years to repair it.
Even if Trump doesnā€™t try to attack Iranā€™s power infrastructure, or damage or seize Kharg Island, its key oil export terminal ā€“ which could see Iran wreak havoc on the regionā€™s energy infrastructure and its critical water supplies, making the global energy crunch semi-permanent ā€“ there will be some long-term damage to global energy supplies regardless of whether the Strait of Hormuz reopens within weeks.
The war will permanently change the energy market.
The threat posed by the Iranians to the traffic through the strait wonā€™t dissipate. Having been shocked by the experience, those countries dependent on the oil and oil derivatives that flow through the waterway will look to reduce their exposure to them. The war will permanently change the energy market.
It is already hurting economies around the world.
Trump has boasted that Americaā€™s status as the worldā€™s largest oil producer means it is insulated from the effects of the war it started.
Tell that to the US motorists, truckies and farmers who have seen petrol prices jump 35 per cent and diesel prices more than 42 per cent, or the Federal Reserve Board members who may have to decide whether to raise US interest rates ā€“ and inflict even more pain on US households while drawing even more Trump ire ā€“ to head off the inflationary effects.
Other major economies are even more vulnerable because the war has hit both their supply of energy and its cost.
Japanā€™s economy, already experiencing inflation, a weak currency and cost-of-living pressures, will experience a surge in energy costs that will flow through to fuel, power and food prices.
Britainā€™s growth rate is expected to halve, with energy costs soaring and fuelling its inflation rate. Bond yields ā€“ which were expected to fall significantly before the war ā€“ are now expected to rise at least 75 basis points this year to respond to the expected spike in inflation.
The European Union, having painfully adapted to the loss of Russian gas, is facing a new energy crisis, this time more related to prices than to supply, having largely switched from its dependence on Russian oil and gas to American LNG. With higher energy costs and Trumpā€™s tariffs, the EU also faces lower growth and higher inflation.
Of the major economies, China, which is by far the most electrified and has at least 1.2 billion barrels of oil in its strategic reserve, is probably one of the least directly affected.
China is, however, dependent on demand from the rest of the world for its exports to sustain its growth, and the war threatens a global economic slowdown, even a recession, that will threaten its export-oriented economic model.
The US economy ā€“ where bond yields have surged by 40 to 50 basis points, the sharemarket has fallen and the headline inflation rate, initially, is set to rise in response to the increased energy prices ā€“ was already experiencing some challenges before it initiated the war.
The labour market was shrinking, inflation was edging up, and the growth rate was edging down as Trumpā€™s tariffs ā€“ effectively a tax on US companies and households ā€“ filtered through the economy.
The domestic impacts of the war, along with Americaā€™s exposure to a global slowdown, can now be added to those of Trumpā€™s tariffs and his trade war on the rest of the world.
Most of the worldā€™s economies have been making slow and sometimes painful progress from the pandemic era and its costs, and the inflationary effects of the global supply chain disruptions. Interest rates had peaked from their post-COVID levels, solid, if unspectacular, growth was being generated and the aftershocks of the war in Ukraine had been absorbed.
Now the global economy faces a new supply side shock that will push up inflation and interest rates again and lower growth rates, with the extent of the damage dependent on each economyā€™s exposure to energy imports and prices and the duration of the conflict.
Governments will have far less financial flexibility to respond to the inevitable slowdown than when they entered the pandemic. Government balance sheets around the world, including the US, are showing record levels of debt.
According to the Institute of International Finance, global government debt rose from $US96.3 trillion ($137.8 trillion) to $US106.7 trillion last year. Thereā€™s not a lot of scope for stimulatory responses to the impact of the war.
The US thought that, together with Israel, it could strike Iran surgically, remove its leadership, topple the regime, destroy its military capabilities and nuclear infrastructure within days, or at most weeks, with minimal disruption to global energy supply
It underestimated Iranā€™s resolve, and miscalculated how it might respond.
Now, regardless of how or when the war ends, the world will pay a price for those costly misjudgments.
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Stephen Bartholomeusz is one of Australiaā€™s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.
