The madness and the mundane
The most overused word of the year, “uncertainty,” is being put to work again. The conflict between Israel and Iran has now drawn in the US. American bombers hit three sites in Iran on Sunday, with the stated aim of destroying Iran’s nuclear capabilities.
While US President Trump claims that he has achieved his goals and that there won’t be further strikes, it largely depends on how Iran retaliates. This could be the end of the conflict or just the beginning. There are several American military bases in the region that Iran could target. As an act of desperation, it could block maritime traffic through the Strait of Hormuz, a narrow chokepoint through which about a fifth of global oil is transported. Trump, meanwhile, risks fighting a military war alongside a trade war, creating political risks for himself having promised to keep the US out of foreign entanglements, and economic risks for the rest of the world.
Black gold
Wars cause human misery, but investors mostly care about the Middle East because of oil. Those who study history know how the Arab Oil Embargo in 1973 and Iranian Revolution in 1979 sank markets and crippled the world economy. More recently, we saw a global inflation surge following Russia’s full-scale invasion of Ukraine.
Chart 1: Brent crude oil price
Source: LSEG Datastream
The oil price increased in recent days as traders fear supply disruptions. When markets opened on Monday morning, it briefly jumped above $80 a barrel, the highest level since January, but still within the broad trading range of the past two years. As Chart 2 shows, the oil price was in line with its long-term average in real terms at Friday’s close. War and geopolitics caused a cumulative sixfold increase in the 1970s, while 2008 saw another extreme move due to the fear that strong demand would outstrip dwindling supply (in reality, the world was nowhere near “Peak Oil” supply while the high price was undermining demand by the minute). Two other notable spikes were in 1990 when Iraq invaded Kuwait and in 2022 following Russia’s attack on Ukraine. In contrast, America’s 2003 invasion of Iraq barely registers.
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