Over the last hundred years, the world has faced numerous financial recessions and periods of stagflation. Every new crisis brought more uncertainty and greater effects to the global economy. In 1973, Arab oil-exporting nations decided to cut oil production by 5% monthly and halt exports to Israel’s allies, which triggered an enormous amount of inflation due to the lack of energy. In 1979, the second oil shock turned into a global energy crisis again due to disruptions in Iranian oil production during the Iranian Revolution.
After that period, crises reshaped around financial markets, such as the 1997 Asian Financial Crisis and the 2008 Mortgage Crisis. Since 2020, we began to see the impact of geopolitical crises, except for the Covid pandemic which was a unique situation.
In February 2022, a war started between Russia and Ukraine, and it led to slower global economic growth, higher inflation, energy issues, and massive global economic costs. In today’s world, there is a war in the Middle East between Israel, the U.S., and Iran, which is affecting all Gulf countries directly and many countries indirectly.
As of March 2nd, this month, the Iranian military announced that they started to restrict ship passage and limit access through the Strait of Hormuz, which was the biggest action to disrupt international trade flow. Despite Iran’s decision, none of the Gulf ports announced an official closure. However, almost all of them operationally closed or working with the minimum capacity. As of March, some of these ports are:
- Jebel Ali, Port Rashid in Saudi Arabia
- Khalifa Bin Salman in Bahrain
- Hamad Port in Qatar
- Mubarak Al Kabeer Port in Kuwait
Gulf Exports Play a Crucial Role Worldwide
Gulf countries’ top export items are crude oil, petrochemicals, and liquified natural gas (LNG). Also, there are other items, including fertilizers, nitrogen-based chemicals, aluminum, gold, and precious metals.
According to trade statistics, the region’s top buyers for all these products are China, India, Japan, and South Korea.
These countries will be the ones impacted directly, but if we consider their production and exports to the world, global price increases will be shown. According to OECD Global Value Chain data, China’s exports include imported goods at 25%-35%, which means any increase in its import rates will be reflected in its export rates directly. The region will not be safe without a ceasefire, and the long-term economic results will impact all over the world, especially those who import from China and India.
Which sectors would be hit?
The following industries and sectors will be hardest hit as a result of the conflict:
- Logistics: Increases in energy prices leads to increased transportation costs.
- Heavy Industry: Increases in the prices of petrochemicals, as well as steel/aluminum.
- Manufacturing: Increase in the prices of packaging materials, as well as electronic components made from plastics/resin. Also, increases in the prices of aluminum parts.
- Agriculture: Decreased supply and increased price of fertilizer during the spring session.
The conflict in the Middle East causes major disruptions for Gulf trade, which has the potential to play a role as a domino for global economic recession. Gulf exports are mainly structured with semi-products, which are used for U.S. and European final products. The global economy needs an immediate ceasefire for stabilization and recovery.
