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Iran conflict would worsen bad economic situation

Dubai, November 15, 2011

The drumbeat for a US or Israeli-led confrontation with Iran is growing. But an attack on the Islamic Republic would have serious economic consequences for the region - and the global economy.

A military conflict could see Brent spike to $175 to $200 per barrel, almost twice its current level, according to several independent analysts. The Arab Spring saw crude peak at $127 per barrel. Iran accounts for 5.2 percent of global production, more than Libya, Egypt, Tunisia and Yemen combined.

The risk is magnified by Iran's potential to disrupt the flow of oil through the Strait of Hormuz, which carries 40 percent of all seaborne-traded oil, according to Barclays Capital.

Even if the presence of US Navy's Fifth Fleet helped keep oil flowing, fear will keep prices elevated.

Saudi Arabia may support a strike, but it would be stretched if it wants to use its oil power to keep prices under control.

Alternative exports routes are few. Opec spare production capacity is only 3.6 mbpd - less than Iran's production. Saudi will also need more than $80 per barrel if it tries to limit the impact on strategic, and politically vulnerable, oil importing neighbours like Jordan, Morocco and Bahrain.

An armed intervention would add pressure to an already weak US financial position. The cost is difficult to quantify. But even a 'short' conflict could involve the US in operations around the Strait of Hormuz for several months.

The impact on financial markets would depend on the exact scenario. If a single oil tanker came under attack, global markets might shed 5 percent and local markets 10 percent or more, according to one analyst. And a leap in the risk premium will stall refinancing efforts of companies across the region, including Dubai.

Anything more severe, such as repeat or sustained attacks that questioned the status of the Gulf as a safe-haven, or the stability of the Lebanese banking system, could trigger a major capital flight. Foreign investors' shares in equity markets in the Middle East range from a low of 2 percent in Abu Dhabi to a high of 14 percent in Egypt, according to estimates from EFG Hermes.

With the risk of a minor confrontation spilling over into something bigger, trying to delay Iran's nuclear programme by force, after sanctions failed to reach the goal, could come at a steep cost.

Iran rejected as 'politically motivated' a report by the UN nuclear watchdog published on November 8 in which the Islamic Republic was accused of working on developing an atomic bomb design.

'The report of the International Atomic Energy Agency is unbalanced, unprofessional and politically motivated,' Ali Asghar Soltanieh, Iran's envoy to the IAEA, was quoted as saying by the semi-official Fars news agency reported.

The Vienna-based IAEA said the data 'indicates that Iran has carried out activities relevant to the development of a nuclear explosive device.” - Reuters




Tags: Saudi Arabia | Bahrain | UAE | Dubai | Iran | US | Brent | cost |

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