For a while now, the global economy has been beating the odds. The energy shock triggered by the American and Israeli attacks on Iran in February set off the largest disruption to worldwide energy flows in history. Yet despite jumps in oil prices, widening conflict in the Middle East, fuel shortages and inflation pressures, the feared crash never came, and most economies managed to muddle through.
But that wiggle room is narrowing just as the outlook darkens. Consider what has happened in just the past few days: attacks forced Saudi Arabia to shut a vital pipeline, Houthi militia seized a strategic Red Sea island and a port city, threatening to further restrict shipping in the region, and proposed negotiations among Gulf nations collapsed. Oil prices have shot towards $110 a barrel.
The price spike has triggered rolling blackouts, rationing and angry protests from Asia to Latin America. In the Philippines, fishermen have docked their boats because they cannot afford fuel. In Bangladesh, power outages have caused hours-long work stoppages at factories. In Guatemala, protesters have burned tyres and cars.
China's stockpile drawdown has eased pressure
Until now, several key moves to ease demand and bolster oil supplies have helped blunt the sharpest price increases and shortages.
"The No. 1 reason why crude oil prices and product prices have not been higher than they are is that China has cut its crude oil imports," said David Goldwyn, a former US diplomat and Energy Department official.
The world's largest oil importer stopped stockpiling and began relying on its own inventories instead, easing pressure on the global market at a critical moment. It also reduced or withheld exports of oil-based products such as jet fuel, meaning it needed less crude in the first place.
At the same time, the United States, Japan and countries across Europe have dipped into their own reserves to keep prices from rising further. The measures have helped: even Asia, the destination for about 80% of Middle Eastern crude and liquefied natural gas exports, has largely been able to secure supplies.
Strategies that can only work for so long
Such approaches, however, have their limits. Storage levels among the 38 members of the Organisation for Economic Cooperation and Development have dropped to their lowest in decades, according to the US Energy Information Administration. In the Gulf, alternative delivery routes, including Saudi Arabia's East-West pipeline, are currently out of operation.
"We're going to be dealing with prices in the $80 to $100 a barrel level at least through 2027," Goldwyn said. Higher prices for fuel and related products such as fertiliser will further push up food and transport costs.
The disruption to energy shipping routes in the Middle East is expected to drive inflation higher still. "What's happening is that we've got very low levels of inventories now, and there's still no sign that the straits can be reopened," said Neil Shearing, group chief economist at Capital Economics.
The Asian Development Bank projects regional inflation will accelerate to 5.2% this year, up from 3.0% last year. In Europe, Britain and the United States, inflation is likely to hover between 3.5% and 4% until at least the middle of next year, Shearing said.
Pressure builds on central banks and refiners
Concern over prices is putting pressure on central bankers to raise interest rates, which would make borrowing more expensive and slow economies further, a particular blow for a country such as Germany, already teetering on the edge of recession.
Limited supplies of refined and crude petroleum from the Middle East are pushing prices higher still. Buffers are shrinking, the International Energy Agency warned last week, and the global refining system is "stretched to the limit."
Ukrainian attacks on Russian refineries have added to the squeeze, forcing a cut in Russia's refining capacity of roughly 30% over the next 18 months, according to the agency. Russia has extended its ban on diesel exports to the end of this month.
The surge in diesel prices prompted President Trump this week to blame Ukraine and urge it not to target Russian refining facilities. Goldwyn said he worries rising prices could push Trump to ban diesel exports before the November midterm elections, a move that would temporarily ease diesel prices at home but, without foreign buyers, likely lead refiners to cut production, tightening global supply further. Such a ban would hit Latin America particularly hard, as a major importer of American diesel.
No region immune
Gulf economies are already reeling from the fallout of the Iran war. Qatar, a leading exporter of liquefied natural gas, is expected to see its economy shrink by 8.6% this year, according to the International Monetary Fund. Saudi Arabia's economy shrank by 4.8% in the second quarter compared with the previous year.
Global shocks often cause the biggest tremors in the poorest countries. African economies rely heavily on energy and fertiliser imports, and the high costs involved may end up reducing harvest yields and pushing food prices even higher.
Most Asian countries have managed to avoid the energy shortages and production halts initially feared, though they have had to pay significantly more for supplies.
Energy prices are far from the only concern. Tariffs are raising costs for consumers and manufacturers. The World Food Programme warned last month that El Niño-related weather conditions could push about 50 million people into acute hunger. Government deficits, meanwhile, have reached record highs.
Japan and Indonesia have spent billions of dollars on fuel subsidies to help consumers weather the price rises. Concerns over countries' ability to repay growing debt have seeped into the bond market: in Japan this month, yields on 10-year government bonds rose to a three-decade high. Anxiety over mounting risks has also pushed the 10-year US Treasury bond, a benchmark that affects interest rates and investments worldwide, to uncomfortably high levels.
Although the United States has been relatively insulated from the worst of the economic fallout so far, that could change. As Goldwyn put it: "At some point when all your trading partners are suffering from high prices and food is more expensive and transportation is more expensive, you can't really escape the laws of economic gravity."
Source: The New York Times
