Another shock for global economy?

A protracted conflict in the Middle East risks causing a spike in energy prices and broader inflation, writes Peter S. Goodman from New York

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ABOVE Firefighters at the Ras Tanura oil refinery in Saudi Arabia on Monday after a drone attack. The Middle East is the source of 30% of the world's oil. LEFT The Strait of Hormuz in 2023. Roughly one-fifth of the world's oil supply passes through the channel. PHOTOS BY REUTERS

(PHOTOS BY REUTERS)

In the most hopeful scenario for the global economy, the latest war in the Middle East ends within a few weeks. The region continues to produce oil and gas. Shipping resumes in the Strait of Hormuz, preventing a shock to the world's energy supplies. Fear of inflation subsides.

But experts cautioned against any hasty sense of reassurance. The American and Israeli bombing of Iran, and Iranian reprisals throughout the region, set dangers in motion that pose a substantial threat to global economic fortunes.

The most alarming fears centred on the possibility that the Iranian government — pushed to the brink of elimination — might unleash more aggressive retaliation, accepting the near-certainty of the intensified bombing of its own territory as the cost of fighting another day. The Iranians would presumably seek to damage the capacity to produce oil and gas in regional powers like Qatar and Saudi Arabia.

Any event that extends the conflict or threatens sources of oil and gas is likely to lift energy prices to levels that would sow inflation. That could prompt central banks worldwide to raise interest rates, pushing up the costs of mortgages, car loans and other borrowing. And that would choke off consumer spending and business investment — a classic pathway to a downturn.

"We're in a very precarious period," said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund and a professor at Harvard.