An already fragile, uncertain business world has just become more fragile and uncertain.
One profound shock was the sight of luxury hotels and residences in Dubai and Bahrain in flames. We live in an era of drones, warfare has changed, and Iran’s ability to attack locations that sold themselves on their security, along with their luxury, has rattled the region. Retaliatory attacks on US bases and energy installations were predictable – even though the Gulf states attempted to draw a line by refusing to allow US aeroplanes to use their facilities.
What was not foreseen were passengers and staff running for cover in Dubai International airport with explosions audible and iconic towers ablaze. While the promised state-of-the-art air defences countered some of the suicide drones, it did not deal with them all. Everyone knew the area was unstable, of course they did, but likewise, it sold itself on safety, and suddenly, most graphically, that has been found wanting.
Flights are grounded, tourists are stranded, expats who went there to live and work in finance and professional services and other sectors, are having to seek sanctuary. They went to avail themselves of the tax shelter, not the bomb shelter.
The war has come home to the glittering cities and financial cities of the Middle East, and it has come home fast. Iran knows that in the Strait of Hormuz, it has a jewel, a bargaining chip. Equally, the US and its military planners are under no illusion as to the chokepoint’s importance. Iran plays with the narrow waterway at its peril.
As soon as news of the US-Israel hits broke, insurers immediately cancelled policies on ships moving through the vulnerable channel, citing war risk exclusions. They did this instantly, on a Saturday, not waiting for underwriters to reach their desks on Monday. So, when the insurance market opens, the cost of premiums will soar, by as much as 50 per cent according to some estimates. The steepness of the ascent and if, indeed, there will be availability of any cover at all, and how long that situation lasts, depends on what happens next.
When Iran was fired upon by Israel last June, the world was forced to hold its breath for 12 days. This time round may be shorter or longer – it’s too early to say.
The markets will resume trading tomorrow in the knowledge that something they thought might happen, that Donald Trump had been warning to expect, has duly occurred. If that provides a degree of comfort, there will be few shrugging – no one is complacent, it will definitely not be business as normal.
What there will be, in front of dealing screens and in offices across the globe, is much head-scratching, and anxious watching and waiting. If the Iranian response to the death of their leader is short-lived, if a government more amenable to the US and its allies takes charge, if the hardliners disappear, if allies of the previous regime choose to stay out, if the oil continues to flow and the Strait of Hormuz remain open, if the UAE and its Gulf neighbours are not subject to repeat attacks…
Those ifs are just for starters. There are many more. Anyone who says they know the answers right now is lying.
What will happen is that investors will take stock. Gold and silver will lift as they have been doing for months, equities may tumble but defence stocks look a sure bet. Anything Middle East-related will be questionable. Will China be emboldened to invade Taiwan? Commitment decisions everywhere will probably be postponed. Until we really know.
Oil will rise in price; we can expect to pay more for our petrol. It’s climbed $10 a barrel since the start of the year in anticipation of something like this occurring. That does not mean it will not jump further – on the contrary, the increase was an indication of how seriously the industry was viewing the likelihood of such an event. Now it’s here, we can expect more of the same.
In one way, it may not be so bad as feared. While Iran sits on the fourth-largest crude oil reserves in the world, it’s also been subject to international sanctions. Its industry has lacked capital investment and is inefficient. The upshot is that, despite the country’s high ranking, Iranian oil accounts for less than 3 per cent of the current global supply, according to the International Energy Authority. It has only one major customer prepared to flout the embargo and that is China, which receives Iranian oil from “dark” tankers heading to the seas off Malaysia and transferring their illicit cargo to Chinese vessels for onward delivery. That scam amounts to about 13 per cent of China’s seaborne imports.
Of far greater concern is the effect of the US-Israel missile strikes and the Ayatollah’s death and ensuing chaos, on the Strait of Hormuz. Should that vital shipping lane for tankers be closed then the flow of oil from Iraq, Kuwait, Saudi Arabia and the UAE will be cut. The impact would be catastrophic, forcing a spike in world energy prices and provoking rapid, “hyper” inflation.
The authorities are going to have impress very hard that all is fine, there can be no repetition. A world that was reeling from tariffs, the progress of AI and climate change has been sent spinning faster still.