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What Effect Will Middle Eastern Conflict Have on the Economy?

by Richard A Reagan

With the assassination of Iranian general Qasem Soleimani, the Middle East has been thrown into even more turmoil. While the Middle East has never been a peaceful place, the recent uptick in attacks both by and against US forces has been ominous. Particularly worrying was the attack on the US Embassy in Baghdad, which penetrated the outer wall of defenses of the vaunted Green Zone. An embassy compound that was once thought to be one of the most secure in the world was suddenly shown to be a paper tiger.

The assassination of Soleimani has led to threats of retaliation from Iran, and counter-threats of retaliation from President Trump. That has many wondering whether the US hasn’t gone and stoked the fires that could start World War III. If a new war were to occur in the Middle East, how would that affect the economy?

Iran’s geographical position at the Strait of Hormuz means that Iran could shut down the strait if it wanted to. Whether that would be in the form of anti-ship mines, missile attacks on transiting ships, or other measures is unclear. But with something like 35% of world oil production passing through the strait, Iran could put world oil markets into a stranglehold. Oil prices would inevitably spike, and economies around the world would slow as they had to reduce their consumption of oil.

Perhaps most important would be the cost of war itself, as it would require trillions more dollars spent by the federal government. That’s on top of the physical cost in lives lost and materiel destroyed as part of the war effort. Iran may not be the strongest country in the world, but it’s geographically far larger than Iraq and has over twice the population. The cost of all-out war against Iran would be far greater than against Iraq, and would likely last far longer.

Given the already precarious nature of the world economy and the likelihood of a coming economic recession, going to war would only further exacerbate the factors leading to an economic downturn. Let’s hope that cool heads prevail and that neither side does anything rash to lead to war.

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