Research: a US-Iran war would trigger a global recession
|A war between US/Saudi Arabia and Iran could lead to a significant oil price spike
The drone attacks by Yemeni rebels on Saudi Arabian oil fields this weekend have raised tensions in the Middle East. Following the attacks, US President Donald Trump warned Iran that if the country was linked to the attacks, the US is "locked and loaded depending on verification, but we are waiting to hear from the Kingdom." For further discussion of the impact on oil production, see Flash Comment International: Saudi oil production under attack. During the course of yesterday, Saudi Arabia said preliminary findings showed that Iranian weapons were used in the attacks but stopped short of directly blaming the Iranian Islamic Republic.
While tensions have certainly risen on the back of the weekend's attacks, we still see relatively low risk of an outright military conflict between the US/Saudi Arabia and Iran. In general, we think the Trump administration will be very careful about entering a military conflict. A conflict would put the oil price on an upward slope, which could hurt the US consumer (see next section). Furthermore, the departure of national security advisor John Bolton, who was advocating for military attacks on Iran, probably means a softer approach.
However, the next days and weeks will be crucial. If we see further drone attacks on Saudi oil fields, it will be difficult for the US to ignore. In such a situation, we expect the US would likely start to line up military firepower around Iran. Meanwhile, Turkey and Russia would step up diplomatic efforts to prevent a conflict (even if neither is on Iran's side) given the geographical vicinity of Iran. Russia would be likely to act as a mediator, as it has good relations with all three parties – Iran, Saudi Arabia and the US.
In a scenario of limited escalation, we would expect the oil market to continue to price a geopolitical premium of around USD5/bbl. We think this premium could be quite persistent as the oil market is not used to concerns over supply from Saudi Arabia. Saudi Arabia is normally the steady hand in the oil market that makes the balance when other producers experience disruptions.
However, if the situation were to escalate significantly and the US decided to intervene militarily in Iran, it would be a significant blow to the oil market and without historical precedent. There would be the possibility of further damage to Saudi oil fields in the process. In our view, in this case we could easily see oil prices rise 200% over the course of a couple of months. That is the experience from the early 1980s following the Islamic revolution and early 1990s during the First Gulf War. From the current level, that would mean an oil price up to around USD150/bbl. We expect the price increase would persist as long as production was depressed, but could quickly return to more normal levels once oil started to flow again.
In the following sections we discuss the global macroeconomic and market implications of an outright military conflict between the US/Saudi Arabia on one side and Iran on the other.
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