An an already fragile, uncertain business world has become even more fragile and uncertain.
Another shock was seeing luxury hotels and apartments in Dubai and Bahrain in flames. We live in the age of drones, war has changed, and Iran’s ability to attack places that have betrayed their security, as well as their luxury, has spread across the region. Retaliatory attacks on US bases and deployments of force were envisaged – although the Gulf states tried to draw a line by refusing to allow US aircraft to use their facilities.
Unprecedented passengers and crews ran for cover at Dubai International airport as explosions were heard and tower blocks caught fire. Although air defenses have been promised against some suicide drones, they have not dealt with all of them. Everyone knew that this place was unstable, yes they did, but at the same time, it sold itself on safety, and suddenly, more clearly, what was found to be missing.
Flights have been canceled, tourists are desperate, immigrants who have gone there to live and work in financial and technical services and other regions, are having to find sanctuary. They went to help themselves to a tax haven, not a bomb shelter.
The war has come home to the glittering cities and financial capitals of the Middle East, and it has come home fast. Iran knows that in the Strait of Hormuz, it has a jewel, chip baiting. Equally, the US and its military planners are under no illusions about the importance of the chokepoint. Iran plays with the narrow water path at its own peril.
As soon as news of the US-Israeli attack broke, insurers immediately canceled policies on the safe passage of ships, indicating that the war was not involved. They did this immediately, on Saturday, without waiting for the underwriters to get to their desks on Monday. So, when the insurance market starts, the price of premiums will go up, by up to 50% according to some estimates. The depth of the rise and if, indeed, there will be any cover at all, and how long the situation lasts, depends on what happens next.
When Iran and Israel were expelled last June, the country was forced to hold its breath for 12 days. This cycle time may be short or long – it is too late to tell.
The markets will resume trading tomorrow with the knowledge that something they thought would happen, which Donald Trump has been warning to expect, has happened. If that provides a level of comfort, there will be little shortage – no one likes it, it won’t be business as usual.
It will be, in front of holding shows and in offices around the world, a lot of head scratching, and trouble watching and waiting. If Iran’s response to the death of its leader is short-lived, if a government approved by the US and its allies takes office, if the hardliners disappear, if the allies of the old regime choose to stay out, if the oil continues to flow and the Strait of Hormuz remains open, if the UAE and its Gulf neighbors do not repeat the attacks…
The ifs are just the first. There are many more. Anyone who says they know the answer right now is lying.
What will happen is that traders will take stock. Gold and silver will rise as they have for months, stocks may fall but defensive stocks look the sure bet. Everything related to the Middle East will be uncertain. Will China dare to invade Taiwan? Volunteer elections everywhere will probably be suspended. Until we know for sure.
Oil will rise in price; we can expect to pay more for our gas. It has risen 10 dollars a barrel since the beginning of the year in anticipation of something like this happening. That doesn’t mean it won’t jump ahead – but, the increase was a sign of how seriously the industry was taking the possibility of such an event. Now that it has arrived, we can expect more of the same.
In other words, it may not be as bad as feared. While Iran is the fourth largest producer of crude oil in the world, it has been subject to international sanctions. Its industry has lacked capital to invest and is dysfunctional. The result is that, despite the country’s high ranking, Iran’s oil accounts for less than 3 percent of the current world supply, according to the International Energy Authority. It has one major customer ready to break the sanctions and that is China, which receives Iranian oil from “dirty” tankers that go to sea from Malaysia and illegally transfer their cargo to Chinese ships for onward delivery. This fraud accounts for 13 percent of China’s seaborne exports.
What is more troubling is the American-Israeli attack and the death of the Ayatollah and the subsequent conflict, on the Strait of Hormuz. If the main tanker route is blocked then the flow of oil from Iraq, Kuwait, Saudi Arabia and the UAE will be cut off. The result would be dire, forcing up global energy prices and sparking rapid, “hyper” inflation.
The authorities will be very happy that everything is fine, it cannot be repeated. The world has been reeling from taxes, AI advances and climate change sent spiraling rapidly.
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