War could trigger oil crisis, warns EIU

The Economist Intelligence Unit (EIU) has warned that if Iran were to become involved in the current Israeli-Lebanese conflict, the results could be “catastrophic” for the world’s oil market.

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By  Andrew White Published  August 6, 2006

The Economist Intelligence Unit (EIU) has warned that if Iran were to become involved in the current Israeli-Lebanese conflict, the results could be “catastrophic” for the world’s oil market. In the group’s latest Global Economic Outlook update, the report highlights a series of geopolitical factors that make the oil price a “risk premium”. The latest risk, according to the report, is that Iran, which backs Hizbullah and has threatened Israel with serious consequences if Israeli forces attack Syria, could become involved in the current war. “Even before the crisis, Iran was a source of concern for the oil market, because of the stand-off with the US over Tehran’s nuclear programme,” states the report. “This could conceivably lead either to international sanctions or US military strikes against Iran, in which case Tehran would probably respond by halting oil exports.” “The onset of Israel/Hizbullah fighting, and the potential for it to escalate to the point that Iran became involved, brought these concerns to the fore,” the report continues. “Iran produces 4.3m barrels per day (bpd) at present and exports around 2.6m bpd. Because global spare capacity is now around 2m bpd — down from 5.75m bpd in 2002 — the cessation of Iranian supplies would be catastrophic for the world’s oil market.” The EIU’s central forecast for the global economy is based on the assumption that Iran completes the nuclear fuel cycle on an industrial basis, and there is no military attack on the country by the US or others. However, the group expects tensions in the regions will remain high over the next few years. Indeed, it anticipates the current conflict to last into the long term. “The position of the Israeli prime minister, Ehud Olmert, has been strengthened by the current crisis, at least in the short term, as the country unites in broad support behind him,” the report acknowledges. “But, given the difficulty of achieving its objective, Israel seems set for a lengthy, low-level conflict with Hizbullah in and around its northern border, to the detriment of stability in Lebanon. The current situation also carries some risk of a broader and much more damaging regional escalation, should Syria or Iran be drawn directly into hostilities.” The report hypothesises that current hostilities will give way to a prolonged stalemate. “Israel would establish military positions and a security zone along the southern Lebanese border, making large-scale but probably temporary incursions in response to attacks by Hizbullah guerrillas,” it predicts. “Hostilities would remain largely confined to Lebanese soil, although Syrian installations might also be selectively targeted in such a way as to avoid provoking a military response. Under these circumstances, the long-term stability of the Lebanese government could be called into doubt, and the wider region would remain unsettled, with increased radicalisation of militant groups. However, the report warns that “there remains the potential for the crisis to expand into a wider regional conflict, engulfing Syria and/or Iran. Although neither regime wants to become directly involved in the conflict, both have long histories of miscalculation when engaging in brinkmanship in times of crisis. It is therefore not impossible that the current outbreak of violence in the Middle East could escalate swiftly beyond the limits currently envisaged by any of the regional actors.” In terms of overall growth, the EIU predicts that 2006 is shaping up to be another good year for the world economy, surpassing the strong performance of 2005. Global growth is forecast to reach an extremely robust 5.2% this year (measured using purchasing power parity - PPP - weights). Economic expansion in developed markets will accelerate slightly, as improvements in the euro zone and Japan offset an expected slowdown in the US. Growth in the emerging world will not match the frenetic pace of 2004, but it will still outperform the best years of the 1990s, with an expected slowdown now postponed until 2007. The EIU provides geopolitical, economic and business analysis on more than 200 countries, as well as strategic intelligence on key industries and management practices. With over 300 full–time professionals in 40 offices around the world, supported by a global network of more than 700 contributing analysts, the organisation is widely known for its informed coverage of major and emerging markets.

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