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22 April 2010 |
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|  | Forbes
Roubini: Attack on Iran causes global tsunami
If Israel attacks Iran, it could impact the world economically and politically. "Israel cannot live with a reality of a nuclear Iran threat," says Israel's Vice Prime Minister Silvan Shalom. On the other hand, Israel doesn't refer explicitly to a possibility of attack. This ambiguity notwithstanding, Shalom states that Iran, which in his view continues its efforts to obtain nuclear capabilities, is "taking advantage of the weakness of the international community and of the ongoing struggle over hegemony in the Middle East between the United States [on one hand, and] Russia and China [on the other]." So for Israel it may soon be time for difficult decisions while Iran continues along the path toward nuclear capability. Israeli military action would cause soaring oil prices that would generate financial, political and ideological unrest around the world. Today the world is barely recovering from a recent severe economic and financial crisis. The collapse of Lehman Brothers was not the only factor that caused a global recession in late 2008; by summer 2008 oil had soared to $145 a barrel. Such rising crude prices were a huge shock to the terms of trade and the real incomes of all the oil-importing countries including the U.S., most of Europe, Japan, China and India. As the price of oil rose sharply, the global economy tipped into a deep recession; and it will spiral downward again alongside a rise in oil prices. If Israel attacks nuclear facilities in Iran, oil is likely to catapult to $140 a barrel in a matter of days. There are historical precedents for such extreme oil price increases during periods of violence in the Middle East. We need only look back at the 2006 Lebanon War--Israel's armed conflict with Hezbollah that was a fairly local conflict with no direct or indirect impact on the supply of oil. Oil jumped during the war to $66 a barrel. During the 1973 Yom Kippur War, the Iranian revolution of 1979, the Iraq-Iran war, the Iraq invasion of Kuwait in 1990 and the Second Intifada in 2000, crude oil soared and on some occasions more than doubled in price. Israel's concern right now is introducing meaningful U.N. sanctions against Iran over its uranium enrichment program. Such sanctions are not possible unless Russia and China sign on. Shalom bemoans that the Iranian summit on nuclear disarmament is "an explicit provocation against the free world which is not acting determinedly against Iranian nuclear ambitions." Last weekend Adm. Mike Mullen, chairman of the U.S. Joint Chiefs of Staff, said military action was a last resort. Critics have voiced their concerns over the lack of clear policy from the U.S. for months. U.S. strategists overall believe that attacking Iran--before having given a chance for muscular sanctions to work--would be a major mistake. Many in the U.S. also take the view that even a nuclear Iran is a problem that can be managed via appropriate and credible deterrence. The U.S. is currently against an Israeli attack in Iran; therefore, a unilateral Israeli attack would further severely strain the relations between Israel and the U.S. So for Israel it may soon be time for difficult decisions while Iran continues along the path toward nuclear capability. Israeli military action would cause soaring oil prices that would generate financial, political and ideological unrest around the world. Today the world is barely recovering from a recent severe economic and financial crisis. The collapse of Lehman Brothers was not the only factor that caused a global recession in late 2008; by summer 2008 oil had soared to $145 a barrel. Such rising crude prices were a huge shock to the terms of trade and the real incomes of all the oil-importing countries including the U.S., most of Europe, Japan, China and India. As the price of oil rose sharply, the global economy tipped into a deep recession; and it will spiral downward again alongside a rise in oil prices. If Israel attacks nuclear facilities in Iran, oil is likely to catapult to $140 a barrel in a matter of days. There are historical precedents for such extreme oil price increases during periods of violence in the Middle East. We need only look back at the 2006 Lebanon War--Israel's armed conflict with Hezbollah that was a fairly local conflict with no direct or indirect impact on the supply of oil. Oil jumped during the war to $66 a barrel. During the 1973 Yom Kippur War, the Iranian revolution of 1979, the Iraq-Iran war, the Iraq invasion of Kuwait in 1990 and the Second Intifada in 2000, crude oil soared and on some occasions more than doubled in price. Israel's concern right now is introducing meaningful U.N. sanctions against Iran over its uranium enrichment program. Such sanctions are not possible unless Russia and China sign on. Shalom bemoans that the Iranian summit on nuclear disarmament is "an explicit provocation against the free world which is not acting determinedly against Iranian nuclear ambitions." Last weekend Adm. Mike Mullen, chairman of the U.S. Joint Chiefs of Staff, said military action was a last resort. Critics have voiced their concerns over the lack of clear policy from the U.S. for months. U.S. strategists overall believe that attacking Iran--before having given a chance for muscular sanctions to work--would be a major mistake. Many in the U.S. also take the view that even a nuclear Iran is a problem that can be managed via appropriate and credible deterrence. The U.S. is currently against an Israeli attack in Iran; therefore, a unilateral Israeli attack would further severely strain the relations between Israel and the U.S. The grave consequences of an Israeli attack would break down into three rings like a series of deadly waves shooting out from the epicenter of an earthquake. These rings represent countries, nations and interest groups. Their placement represents the proximity to the center of the eruption. Some of Israel's neighbors form the first ring, which is the "epicenter" of the quake or attack. They include Lebanon, Egypt, the Palestinian Authority and Jordan. These nations currently harbor resentment against an Israel seen as unwilling to make the necessary compromises to achieve a lasting peace. Together this group of countries represents the key peace process players. These nations do not support Iran and fear it could obtain nuclear weapons capability. They contain radical elements, such as Hezbollah in Lebanon and Hamas in Gaza, which are supported by Iran both ideologically and financially. These elements are extreme enough and wield enough influence over the people to endanger the current moderate regimes of some of these Muslim countries. The grave consequences of an Israeli attack would break down into three rings like a series of deadly waves shooting out from the epicenter of an earthquake. These rings represent countries, nations and interest groups. Their placement represents the proximity to the center of the eruption. Some of Israel's neighbors form the first ring, which is the "epicenter" of the quake or attack. They include Lebanon, Egypt, the Palestinian Authority and Jordan. These nations currently harbor resentment against an Israel seen as unwilling to make the necessary compromises to achieve a lasting peace. Together this group of countries represents the key peace process players. These nations do not support Iran and fear it could obtain nuclear weapons capability. They contain radical elements, such as Hezbollah in Lebanon and Hamas in Gaza, which are supported by Iran both ideologically and financially. These elements are extreme enough and wield enough influence over the people to endanger the current moderate regimes of some of these Muslim countries. Following an Israeli attack, Iran would most likely retaliate against Israel with long-range missiles. The attack would ignite an immediate uproar of nationalism in Islamic countries--especially on the "Arab Street"--as a strong Muslim sentiment prevails in these countries. This action in turn will activate Hezbollah, Hamas and local sleeper cells, severely damaging regional economies and political stability. We are also likely to see other Iran proxies become active in the other rings in a later phase. The fear premium in oil prices would spike, as Iran would unleash its proxies in these countries, as well as sending some missiles toward Israel. Countries who fear Iranian hegemony in the region from both an economic and political standpoint--such as Iraq, Pakistan, Afghanistan, Turkey and Saudi Arabia--are likely to also suffer aftershock effects of the attack. In the second phase Iran is likely to strike back with an attempted blockade of the Strait of Hormuz, creating a damaging bottleneck for oil shipments out of the Persian Gulf. Like a cascade, Saudi Arabia and the Arab Gulf States would be drawn into the conflict as their own security and business interests are impacted. Even if Iran did not successfully block the Strait of Hormuz, just the threat of such a blockage--in the form of a few Iranian missiles launched against oil tankers in the Strait--would send oil prices racing higher. A bigger financial and economic Tsunami wave would gain strength if Iran were to react by imposing a global embargo on oil exports. By curtailing oil production and restricting supply for exports for a few months, together with the other factors described above, the "fear premium" would likely double oil prices. This type of action would have sweeping consequences on countries such as the U.S., China, India, Russia, Japan, the E.U. and other major industrial nations. This ring is characterized by its dependence on foreign oil, its influence and execution of the rules of engagement in war and its political interests in the Middle East. These are states whose financial markets would react severely following major "Richter scale" events like a military strike in Iran. Why tsunami? If oil reaches even $120 a barrel, let alone a higher level, the global economy would tip again into a catastrophic global recession. While oil-exporting Arab states and Russia would initially benefit from surging oil prices, the benefit would be very short-lived. Just as it did in 2008, a global recession would eventually cause oil prices to collapse. Oil receded to $30 a barrel after the global economy faltered and Russia experienced a sharply negative growth in 2009. That boom-bust cycle would repeat itself following an Israeli attack. Israel is merely a blip on China's political radar, but China would certainly feel the brunt of an attack in Iran thousands of miles away. The Chinese social and political stability is conditional on China achieving at least 8% growth per year. If China were to fall into a near recession again over an oil price crisis, severe social unrest among its 1.3 billion inhabitants would only be a matter of time. The Israeli Vice Prime Minister Shalom believes that sanctions in Iran can be effective if they are tangible and meaningful and well coordinated. "Sanctions can change a state of affairs, such as witnessed in the state of South Africa, Libya and North Korea. However, right now the sanctions are not effective because of the refusal of Russia and China to join them." Iran's nuclear summit last weekend closed with a statement calling for Israel to join the Non-Proliferation Treaty (NPT), but Israel is convinced that its existence is threatened by a nuclear Iran. A former high-ranking Israeli official shared the seismograph survey of the standoff by explaining: "You don't quite understand how fragile the situation is." Nouriel Roubini, a professor at the Stern Business School at New York Universityand chairman of Roubini Global Economics (RGE), writes a weekly column for Forbes. Camilla Webster is a journalist who has covered the Middle East, international business and U.S. foreign affairs for Forbes, CNBC, The Wall Street Journal, CBS News, Fox News and The History Channel. Shai Baitel served in Israel's Ministry of Justice and at the United Nations. He holds an LLM in International Law as well as degrees in Law and Middle East Studies.
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