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There is never any room for complacency regarding the economic consequences of the conflagration in the Middle East.
This is especially true when Iran, a major oil producer, is directly involved.
But with each geopolitical crisis, the threat of a blockage of Gulf supplies becomes less significant.
America’s energy independence and surpluses, as a result of the fracking revolution, dramatically changed the equation. Russian production may be sanctioned by the West, but it has found ready markets in India and China.
In Britain at least, renewable energy, which in the last quarter accounted for 51.6% of electricity generated, has eased our dependence.
Escalating conflict in the Middle East has driven up prices amid fears of supply constraints
This despite Energy Secretary Ed Miliband plundering the security of energy supply with a ban on new exploration and drilling in the North Sea and a sclerotic approach to new nuclear power.
There was a sharp reminder of past crises and their malevolent impact this week as Jimmy Carter became the first US president to turn a century.
His presidency in the late 1970s came in the wake of the Yom Kippur War and the OPEC oil embargo.
The consequence was that the price of oil quadrupled, leading to soaring inflation and interest rates and an energy-induced economic malaise that drove Carter from office.
The sinking oil price has “come back with a vengeance,” as Bloomberg reports.
Clearly, if Israel decides to target Iranian production, currently at 1.7 million barrels per day, or if a hostile actor manages to block the Strait of Hormuz, the cost of oil and gas could skyrocket.
Fuel costs started at a remarkably modest level before Iran’s missile attack on Tel Aviv. The increase of almost 9% to $76 a barrel does not represent any danger to global stability.
Forecasts of $120 a barrel appear to be more of a commercial opportunity than an underlying reality.
Saudi Arabia, which is supporting the West against Iran’s “arc of resistance”, said this week it would increase production to boost weak revenues.
The uncertainties are multiple.
The world witnessed, with the conflict in Ukraine and the interruption of European oil and gas supplies, how problems in the energy market can skyrocket the cost of living, requiring a monetary response that harms growth prospects.
So far there are solid supply reasons not to hit the panic button.
stable doors
The most striking conclusion of the Bank of England’s financial policy committee, which seeks to protect us all from economic shocks, is that stock markets are susceptible to sharp corrections.
This was evident in August, when a tightening of the US labor market sent stocks around the world tumbling.
More fascinating is how two years after Truss’s tantrum and the damage done to the bond market and pensions, as a result of a spin-off product known as Liability Driven Investments (LDI), the Bank is still struggling with the problem.
At the time it opted for a Panglossian response, claiming that it had warned of potential problems (buried in its financial stability report) and took credit for fixing them after Governor Andrew Bailey admitted it had required “late nights”.
The sharp drop in bond prices sent interest rate yields soaring and threatened a cascading financial crisis that would hit millions in private sector pensions and insolvencies among lenders.
Two years later, the Bank has devised an alphabet of solutions to deal with what we must now call NBFIs or non-bank financial institutions. You are creating a CNRF, or new Contingent NBFI Repo Facility.
In other words, a rescue mechanism to deal with tensions that threaten calm. So after all, the Bank lacked the awareness and tools to avoid the threat of LDIs failing in the first place.
War and peace
The current violence in the Middle East comes a year after the brutal October 7 attacks on Israel and comes as Jews gather around tables to eat apples and honey, and in synagogues to mark the start of the New Year. 5785.
Rosh Hashanah marks the beginning of ten days of personal reflection, an opportunity to atone for past mistakes and look toward a brighter future. May everyone enjoy a sweeter, less traumatic and peaceful year.
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