Despite fundamental growth problems in the global economy, geopolitical tensions in the Persian Gulf seem set to trigger yet another round of nervous hikes in international oil prices. So far, oil above 100 is definitely overbid, especially since markets have not yet priced in any unintended, or intended, consequences of war clouds gathering over Iran. Yet with Tehran throwing an unexpected ace as its first visible move – blockading the Straits of Hormus for ‘regular military exercises’ – oil is likely to break its uncertain, range-bound trading pattern to the upside. That is bad news for emerging markets, and bad news for Pakistan considering its present low-growth dilemma.
In case of further escalation, it is difficult to foresee a not-so-sobering outcome. One, expensive oil seriously threatens to derail fragile recoveries in America and the euro-zone, both beset by debilitating hangovers from the ’08 recession. Two, it will make retaining struggling emerging economies’ growth trajectories that much more difficult, slowing down Asia. Three, it will burn America-friendly oil barons in Riyadh, long the stabilising force in international oil. They have always been wary of the consequences of too-expensive-oil, and how demand slowdown in the west can compromise its own vaults. But with a $130 billion social spending package to stall a building spring in the oil-rich eastern provinces, it’s support price has risen to the $90-100 range, forcing it to stand with “intolerable” Iran and Venezuela at the opec conclave. Four, the worst blow will be dealt to economies mired in stagflation, already suffering low-growth and high-inflation, like we are.
Granted, no economy is immune to international shocks, especially oil price gyrations. But considering how oil movement causes input price correction across the board, commodity price alone can seriously derail our economy. The prime reason is that our economy is continuously near break-down point, unable to withstand exogenous shocks, which is simply poor planning. These developments should prompt some manner of proactive posturing in Islamabad.