Iran conflict may boost global economy

The longer the Iran war lasts, the more damaging its economic fallout, and the better off the global economy may be in the long run.

According to the report, war is ugly, cruel and deeply painful, and the economic harms of this one have hurt billions of people around the globe.

Nevertheless, the world could undergo some fundamental and necessary changes as a result of the war’s destruction.

The energy supply chain is likely to be hardened and diversified, preventing a single 23-mile-wide waterway, the Strait of Hormuz, from becoming a chokepoint for the global economy.

OPEC may also be smaller or dismantled, potentially reducing oil and gas prices.

The energy supply chain could be more resilient, with pipelines that bypass the Strait of Hormuz altogether, and the world could accelerate its shift to renewable energy sources, reducing the world’s reliance on fossil fuels.

Economists and military experts agree that some long-term good could come from the deeply unpopular war.

The war exposed significant structural flaws in the global energy supply chain, a complex, interwoven system that balances redundancy and efficiency.

According to Jay Hatfield of Infrastructure Capital Advisors, “Countries aren’t stupid: they’re going to develop pipelines and massively increase capacity. No one will bet their whole future again on the Strait of Hormuz. That’s an enormous positive.”

This would mean energy supplies could be more secure – and cheaper – in the long run, as the world has been paying for high insurance costs built into transit through contentious waters.

Ross Mayfield, an investment strategist at Baird, noted that “Oftentimes it takes shocks or unexpected exogenous events to reinforce that things need to change.”

They have seen these shifts several times this decade alone, such as after the pandemic, when the world’s manufacturing supply chains broke and then were significantly strengthened.

Resilience in the energy supply chain couldn’t come at a better time, as the world’s demand for energy has become insatiable, with tech companies building power-hungry AI datacenters at breakneck speed.

The United States could be well-positioned to help, as natural gas remains the largest power source for electricity production, and America is swimming in it, with increased export capabilities, which could also improve the tax deductions for companies involved in the energy sector.

Joe Brusuelas, chief US economist at RSM, said, “This could very well turn out to be a good thing – despite the temporary economic dislocation – if on the other side of this, freedom of navigation is restored, oil, natural gas and distillates are free flowing and the cartel collapse.”

Some economic changes are already solidifying, with OPEC starting to fray, as the United Arab Emirates, the second-largest oil-producing member of OPEC, said it would leave the cartel, weakening OPEC’s ability to set the production quotas that keep prices high.

Rob Thummel, senior portfolio manager at Tortoise Capital, noted that “Diversifying production away from OPEC and toward more reliable suppliers — particularly the United States — should improve global energy security and help stabilize prices over time.”

The switch to solar is also well under way for many parts of the world, because of the oil price shock, with Chinese exports of solar technology, batteries and electric vehicles all reaching record highs in March, according to energy think tank Ember.

However, the new Iranian regime in place could be even more radicalized and hellbent on harming the United States, Israel and their allies, which could threaten other channels and pipelines in the future.

Heather Long, chief economist at Navy Federal Credit Union, noted that changes that come from the Iran war reckoning may be kinder to some than others, such as a switch to renewables, which could come at the expense of Texas’ Permian Basin.

Brusuelas said, “So much of this depends on what’s permanent and what’s temporary.”