Forget about Greece, it’s all about the oil

posted by rossgillam

Following the second €130bn bailout for Greece, you could be forgiven for thinking that the Eurozone crisis might finally be abating. However, the increasing tensions between Iran, Israel and the West pose a significant threat to economic recovery.

As Gideon Rachman wrote this week, the threat of conflict with Iran is increasingly real. Israel’s Defence Minister, Ehud Barak, has stepped up the rhetoric against Iran, recently calling for tighter nuclear sanctions, to the extent a pre-emptive missile attack by Israel no longer looks out of the question. Similarly, whilst the Foreign Secretary, William Hague, explicitly said the Government are not advocating military action against Iran, Mr Hague would not support a backbench motion calling for the unilateral ruling out of it.

Added to this is the escalation of conflict in Syria. Despite the veto by Russia of a recent UN resolution that sought to put an end to Bashar al-Assad’s authoritarian regime, increased media attention of al-Assad’s crackdown, heightened by Marie Colvin’s untimely death this week, means some form of military intervention from external sources also looks more likely than previously believed. Such intervention is likely to provoke a response from Iran, a fierce ally of al-Assad, which could draw in other regional players, such as Saudi Arabia and Israel. Whilst such a scenario currently seems a long way off, as events across the Middle East have shown us in the last 14 months, anything is possible.

What do these latest events mean for Europe’s economic prospects then? Well, conflict on this scale would have a huge economic impact across the Eurozone, as Europe’s access to existing oil sources would be drastically hindered, causing the price of oil to soar. Energy intensive industries and manufacturing would be hit hard by a further increase in oil prices, to the extent it could push numerous European economies back into recession.

The news that brent crude oil has hit €93.60 per barrel, a record price for euros surpassing the previous 2008 high, shows that oil prices are already eye-wateringly high due to availability issues emanating from the Middle East caused by regional instability.

History shows us that instability in the Middle East has a big impact on the price of oil – the graph below shows spikes in the price of oil during the Yom Kippur War, the Iranian Revolution, Iraq’s invasion of Kuwait and the US invasion of Iraq in 2003. Increased tensions, let alone conflict, could have a similar impact this time around.  

Image from: EEF

Similarly, the FTSE 100 has shown us the negative impact Middle Eastern conflict and the rise in the price of oil has on markets. A low of 3613.30 in March 2003 marks the point at which the US invaded Iraq.

Whilst the bailout of Greece should be welcomed and may cause some to feel sanguine, there is still much cause for concern.

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