The economic impact of the US and Israel attack on Iran on Saturday, 28 February, will be determined by the duration the conflict lasts, economists told Khaleej Times.
William Jackson, chief economist for emerging markets at Capital Economics, noted that the effect will also depend on the extent of Iranian retaliation and the resulting spillovers in the oil market.
“A limited set of strikes could plausibly send oil towards $80 per barrel, while a longer conflict that causes disruptions to supply could send prices much higher – with a material effect on global inflation,” Jackson told the news portal.
The US and Israel launched “Operation Epic Fury,” triggering a new military clash in the Middle East. This attack comes days after US President Donald Trump warned to destroy Iran’s missile stockpile and stop its nuclear weapons development. In response to these strikes, Iranian forces retaliated, targeting at least four US bases across the Middle East, the Wall Street Journal reported.
According to reports, the US and Israeli attacks on Iran are likely to continue over the coming days. Iranian officials have been vocally aggressive, and the Iranian military has announced that Iran has conducted drone and missile strikes against Israel in retaliation.
What is the expected economic impact?
“Iranian retaliation is likely to weigh on Israel’s economy. The 12-day war with Iran in June last year resulted in a fall in GDP of 1.1 per cent quarter-on-quarter in Q2. Elsewhere in the Middle East, there may be disruptions to activity arising from the threat of an Iranian attack on US military bases in the region (e.g. in Bahrain and Qatar) and from airspace closures,” Jackson added.
He mentioned that the overall impact on the global economy will depend on how the oil market is affected.
What will be the impact on oil prices?
With the US military build-up, the political risk premium in oil prices has surged. Brent crude may reach $80 a barrel, but could climb to $100 if the conflict impacts Iranian oil supply or blocks important shipping routes.
“Estimates suggest that the political risk premium baked into the oil price has already risen substantially amid the US military build-up in the region. That said, even if strikes remain limited, we think Brent crude oil prices might rise to about $80 a barrel (around their peak during the 12-day war), from $73 a barrel on Friday. But oil prices would rise much further if the conflict is prolonged and, in particular, if it affects actual oil supply – due to disruptions to Iranian supply or to Iranian attempts to block the Strait of Hormuz. That could cause oil prices to jump, perhaps to around $100 a barrel,” he was quoted as saying.
According to Jackson, global oil supply risks suggest OPEC+ is likely to increase production quotas at the upcoming meeting, potentially exceeding the anticipated 137,000 bpd.
“Events are in flux, but one thing we can say with more certainty is that the risks to global oil supply make it even more likely that OPEC+ opts to raise production quotas at the meeting this weekend – and perhaps by more than the rumoured 137,000 bpd,” he added.