Escalating Conflict in the Middle East
Executive Summary
- The United States joined the conflict in the Middle East, bombing three subterranean nuclear facilities in Iran over the weekend.
- The Middle East’s contribution to global economic activity may be relatively small, but second-order effects should be watched closely.
- The Middle East is home to three major maritime shipping choke points and a notable portion of the world’s oil production.
- OPEC spare capacity could help fill a gap if Iran’s oil production faces disruptions, but further shocks would be much harder to offset.
- Geopolitical events have historically caused market volatility but are typically short-term disruptions to the market’s longer-term growth.
The Middle East’s global economic contribution is small, but second-order effects should be watched
Data shown represents the relative contributions of different continents to global gross domestic product (GDP), population and international trade. GDP figures are based on real 2021 prices and expressed in purchasing power parity terms to account for cost-of-living and exchange rate differences, in U.S. dollars. Trade data represent the value of goods and services exports, expressed as a percentage of global trade, adjusted for inflation and based on real 2015 prices in U.S. dollars. Oceania includes New Zealand, Australia and the surrounding islands.
- The Middle East is a relatively small direct contributor to the global economy, but disruptions in this region could still ripple through to other regions given how interconnected the world has become.
The Middle East is home to three of the world’s major maritime shipping choke points
Shown is a world map with blue dots representing major maritime shipping chokepoints.
- The Strait of Hormuz is the closest in proximity to Iran and the most likely to be at risk of closure during a period of escalated conflict.
- Disruptions to any of the three major ports in the Middle East could snarl global trade routes.
Escalated conflict may appear in energy prices, which have recently been a driver behind falling inflation
Shown in the left panel is a color-coded map of top exports for various middle eastern countries based on full year 2022 figures via the Central Intelligence Agency’s Factbook. Shown in the right panel are the 3-month annualized percent changes in the U.S. CPI components. Food & Energy is represented by the food & energy subcomponents. Services (ex. Shelter) is represented by Services Less Rent of Shelter. Shelter is represented by Rent of Shelter. Goods (ex-Food & Energy) is represented by the commodities component (excluding food & energy). CPI measures the price of a basket of goods & services consumed by U.S. households.
- Oil and petroleum-related products are top exports of multiple nations in the Middle East, with the region accounting for nearly a third of the world’s oil production.
- Disruption to the supply of oil could reverse a decline in oil prices that has been a driver behind the recent decline in inflation.
Shutting down Iran’s oil fields would be significant, but OPEC spare capacity may help fill the gap
Shown in the left panel is a country/region breakdown of global oil production, measured in millions of barrels per day and the percentage contribution to global production. Shown in the right panel is the Organization of the Petroleum Exporting Countries’ (OPEC) spare crude oil production capacity (i.e., the amount of daily production that can be brought online within 30 days time) in millions of barrels per day.
- Iran accounts for a notable 4% of world oil production, but current OPEC spare crude oil production capacity could be enough to offset its potential loss if fully utilized.
- While Iran’s supply may be met by tapping spare capacity, further disruption would be much harder to replace.
Equity markets have a long history of growth despite the frequency of difficult events and downturns
Data represent the growth of $1 invested in U.S. large cap stocks at the beginning of 1940 with dividends reinvested, represented by the S&P 500 from 1970 to present and returns from Robert Shiller for periods prior. Callout text refers to major economic and geopolitical events over the timeframe. LTCM refers to the Long-Term Capital Management hedge fund. Past performance may not be indicative of future results. One cannot invest directly in an index.
- History is littered with numerous meaningful events that were seen as near-cataclysmic at the time and caused notable market volatility.
- Nevertheless, markets seem to be able to eventually find their way back to the long-term growth trend even after such events.
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