The conflict between the United States, Israel and Iran is affecting the global economy across a broad range of areas, from energy supplies and food costs to supply chains. Christopher Smart, who served as an economic adviser in the Obama administration and is managing partner of the Arbroath Group, says the situation represents an opportunity for some countries and sectors, while placing heavy economic pressure on others.
Hormuz risks could reshape global supply chains
According to Smart's assessment, the weakening prospect of a lasting agreement between Washington and Tehran could turn restrictions on maritime transport in the Strait of Hormuz from a temporary disruption into a permanent feature of the global economy. Although the possibility of an agreement remains, the disruption of the region's fragile balance could push countries to avoid renewed dependence on the narrow waterway for vital supplies.
Alongside the conflict's human toll, its economic consequences are emerging as a supply shock. As buyers seek new suppliers and alternative transport routes, some markets are contracting while commercial activity is accelerating in other areas.
Gulf exporters and vulnerable economies under pressure
Gulf exporters are among those bearing the heaviest economic impact of the crisis. Although the Strait of Hormuz has not been completely closed, at least 12 commercial cargo ships pass through it on most days; the number of vessels sailing without tracking devices may be higher.
Rising oil prices are partly easing pressure on producers such as Saudi Arabia. By contrast, the International Monetary Fund forecasts that the economies of Kuwait, Qatar, Bahrain, Iraq and Iran will contract over the course of the year.
Egypt, Pakistan, Jordan and Lebanon are also among the countries feeling economic pressure because of their proximity to the region. Rising energy bills and disruptions to fertilizer shipments from the Gulf are driving up food costs, while higher biofuel prices are feeding through to cooking oils. The loss of remittance income sent home by workers employed in Gulf countries is also increasing pressure on these economies.
Asia's large reserves shield energy importers
Japan, South Korea and Taiwan have appeared more resilient in the early phase of the crisis, thanks to the buffer provided by their large national reserves. These resources are limiting the panic that could result from efforts to find new supply routes.
However, the depletion of reserves over time could reverse the current stability. China's oil reserves, estimated at between 1.2 billion and 1.4 billion barrels, have enabled Beijing to significantly reduce its energy imports and limit a further escalation of supply panic in global markets.
Alternative energy exporters gain an advantage
Canada, the United States, Nigeria and Colombia are among the countries benefiting from increased capital flows as alternative oil exporters. Although consumers in these countries are facing higher fuel and heating costs, their governments could see an increase in corporate tax revenues.
Norway, one of Europe's major natural gas suppliers, is also among the countries benefiting from the energy crisis. Russia could have gained more economically from the crisis if it had not faced Ukrainian drone attacks on its oil-refining infrastructure and refined-product exports.
The energy shock is affecting supply chains extending from air transport to aluminum and semiconductor production. Aviation fuel costs are increasing airlines' expenses, while aluminum producers are struggling to access cheap natural gas. The price of helium used to cool semiconductor wafers is also rising.
Shipping companies that are not stranded in areas of active conflict are benefiting from higher freight rates. Rising geopolitical risk premiums are increasing insurers' revenues, while the US involvement in supporting reinsurance costs is making marine insurance more profitable.
Efforts to develop alternative routes that can carry energy from the Gulf to safe ports are expected to create new business opportunities for global pipe manufacturers and pipeline construction companies. Rising fossil-fuel costs could also accelerate investment in renewable energy and nuclear infrastructure.
US defense spending lifts expectations
US and Israeli strikes on Iran could initially mean higher ammunition demand and profit margins for weapons manufacturers. Even if President Donald Trump's requested $1.5 trillion budget for next year is not fully approved, Pentagon spending is expected to increase.
Defense budgets are also trending upward in European countries, Japan, South Korea, Australia and most of the United States' leading allies. However, investors' focus on long-term profitability through new contracts has led to volatility in the shares of major US defense companies over the past six months.
Smart says the defense industry is benefiting from global tensions stretching from Donbas to the South China Sea, but has not gained a direct and one-way advantage from developments in the Gulf.
Although the United States and Iran have threatened to take tougher steps against each other, the two sides are not considered intent on escalating the crisis into an open war. As uncertainty over the reliability of passages through the Strait of Hormuz forces the global economy to adapt to new supply and transport routes, the transformation is creating unexpected areas of gain alongside losses.
