x Abu Dhabi, UAEFriday 28 July 2017

Conflict with Iran would send shockwaves across the world

The consequences of a possible military conflict in the Gulf would set back economic and social progress in the region.

As Friday's nuclear talks with Iran approach, there are storm clouds in the distance. Global security would be affected by a conflict and the global economy remains in a risky, brittle state as it attempts to dig itself out of one of the worst recessions since the Second World War.

Much of the world seems to be asleep at this potentially momentous time. Some seem to think that it would be possible to simply run aircraft sorties attacking Iranian nuclear sites and that would be that. Their assumption is, of course, that Iran would back down and cower. That seems unlikely.

Iran may not have the most powerful military in the world, but it is clearly an aggressive state. Aside from the possibilities of terror attacks by Iran's own forces or from its satellite groups, there are also possibilities of significant risks to the oil and water infrastructure of the Gulf.

What is worrisome is what might happen to Ab Qaiq, Ras Tanura, Jubail and elsewhere in Saudi Arabia; what might happen at Al Basra Oil Terminal in Iraq; and what might happen to the Kharg and Lavan Island oil facilities in Iran.

There are numerous other vulnerable oil and gas facilities in the Gulf region. These facilities are both onshore and offshore. Many offshore oil rigs could be as vulnerable as they were during the Iran-Iraq War of the 1980s. Oil tankers and LNG ships are easy targets.

Then, of course, there is the Strait of Hormuz. About 16 million barrels of oil pass through the strait every day. There is also a considerable amount of liquid natural gas going through the strait from Qatar. Much of the oil going through this chokepoint is on its way to Asia to the growing economies of China, India, South Korea and Taiwan. Much of the natural gas is on its way to Japan.

China is one of the most important engines of the global economy, India is a growing economic power, and South Korea and Taiwan are important countries in world trade.

There has been very little discussion about what might happen to the Chinese economy or even to the stability of Chinese society if there were a huge oil price shock. What might happen to India? Sri Lanka relies 100 per cent on Iranian oil. Most of the growing Asian countries would suffer a huge economic and social hit if a worst-case scenario played out in the Gulf.

Americans complain about paying $4 (Dh15) for a gallon of petrol. Much of the EU pays twice that. The Turks are paying close to $10 per gallon. What would happen to petrol prices worldwide if oil hit $250 a barrel?

What would happen to inflation and unemployment in much of the world? Some of the most vulnerable places to oil shocks are in developing countries in regions such as sub-Saharan Africa. Think of the economic and social shocks in many of the most vulnerable countries.

The world economy is in many ways a hydrocarbon economy. It is fuelled largely by oil and gas. The Gulf is one of the most important places to find these fuels, with all of the global excess capacity for oil production. Eighty per cent of this is in Saudi Arabia, and all of it is on this side of the Strait of Hormuz.

Then, there is water. Much of the water used by farms, factories and households in many of the Gulf states, and in particular the UAE and Qatar, comes from desalinisation. Some of the most important coastal cities in Saudi Arabia rely on desalinated water. The UAE and Qatar may have a few days of water reserves in a crisis.

And desalinisation facilities are vulnerable, both to attack and, more so, to the oil slicks and other dreadful pollution of war. These desalination factories need the Gulf waters, and the intake pipes cannot filter out oil and other liquid pollutants. And there is no real substitute for the water produced by the desalinisation plants along the coast.

Another concern is food security. The UAE and other Gulf countries get a majority of their food from imports through the strait. There are alternative routes for some of the oil and food, although there are limits to those alternatives that have not been discussed enough.

There are potentially major costs involved even in a limited conflict. The nuclear meetings with Iran must realise some progress, and continue well beyond this Friday to finally start to ratchet down the tensions and threats of conflict.

Iran needs to become transparent on the goals and objectives of its nuclear programme. All sides need to understand the costs of any conflict, protracted or otherwise, in the region. However, all sides also need to understand what might happen if Iran does go nuclear, the Israelis attack, the region is thrown again into a war or any of the numerous scenarios that are possible.

The Gulf states have come a long way since the 1960s and 1970s. Countries like the UAE and Qatar would be almost unrecognisable to people who lived here during the days before oil and gas. The huge economic and social shock associated with a possible conflict would set that progress back.

There are still many ways that this dilemma could work out with tensions dissipating with diplomacy and meaningful discussions. However, we need to be aware of the possible risks, and the economic and social consequences that would be felt across the Gulf and further afield.

However, we also have to consider what the region might be like with a nuclear-armed Iran.

 

Dr Paul Sullivan is a professor of economics at the National Defense University and an adjunct professor of security studies at Georgetown University in Washington DC