‘Good for Russia, good for China, bad for America’: how the Iran war is reshaping global economies and power

The missiles may eventually stop for good. Oil tankers will once again pass through the Strait of Hormuz. But even if the tenuous two-week ceasefire gives way to a lasting end to hostilities, the world economy that emerges from the Iran War will bear little resemblance to the one that entered it.

Recommended Video

That is the conclusion of investors, economists, and strategists around the world. The common thread isn’t fear of a specific catastrophe. It’s something more unsettling: the sense that a series of permanent structural shifts—in supply chains, in geopolitical alliances, in the balance of economic power—have been accelerated by a war that nobody in power fully planned for.

“It’s going to look fundamentally different for a while, no matter what,” said Steve Hanke, professor of applied economics at Johns Hopkins University. He summed up the new world order to be defined by the winners and losers of this unfolding disaster in three statements: “Good for Russia, good for China, bad for America.”

courtesy Goh Seng Chong/Bloomberg via Getty Images

Even if the new cease-fire holds and energy prices recede, relief won’t come quickly—and the ripple effects of higher prices could still cause global recession or even depression. The Trump administration’s erratic military escalation, meanwhile, could be an even more disruptive force over time, breaking up longtime economic alliances and undermining the country’s status as the world’s most powerful economy.

The war nobody planned

Hanke, who has advised governments from Argentina to Estonia on monetary reform, said many of the problems stem from an initial assumption that the war would be over in a matter of days. It appears that the United States went in without accounting for the vast web of commodity supply chains running through the Gulf—and is now watching ripple effects spread into every corner of the global economy.This was a major planning failure, he said: “You better know all this shit’s going to hit the fan if you go to war,” Hanke said. “They clearly didn’t.”

Kate Gordon, an energy policy expert and former senior advisor at the U.S. Department of Energy, went further: “It is naive to think that this is just an isolated conflict and the strait will open and everything will go back to the same way it was,” she said. “We’re continuing to attack actual infrastructure, which means things beyond the strait are going to need to be rebuilt.”

courtesy of Kate Gordon

The oil story looks dismal—the Strait of Hormuz has emerged as a global chokepoint; the national average in the U.S. is over $4 per gallon; and countries more reliant on Iranian supply have seen price surges of more than 50%. And yet Wall Street has continued to price in an early end to the conflict.

Even if that comes to pass, Hanke said, don’t expect cheaper prices at the pump anytime soon. His central point: There are two prices for any commodity. The physical price, paid when tankers actually unload cargo; and the paper price, traded on futures markets. When the war began, those two prices split violently. Physical oil in Asian markets spiked past $150 a barrel; the paper market never climbed that high. Oil loaded before the war takes four to six weeks to reach its destinations, and that prewar inventory is only now arriving at ports. Once it runs out, the paper price will be forced to converge with the physical—and it has nowhere to go but up.

Robert Hormats, a former vice chairman of Goldman Sachs International who served as a senior aide to Henry Kissinger during the 1973 Sinai negotiations following the Yom Kippur War, added a structural reason for skepticism about a quick resolution. His central worry is that Iran, even if seriously damaged, could emerge as a “wounded bear”: hurt enough to be humiliated, but intact enough to still control the strait and continue backing groups such as Hamas, Hezbollah, and the Houthis that destabilize the region. “The longer it lasts, the more serious the likely scenario,” he said. A damaged but defiant Iran could use those levers again at any moment.

Robert Hormats, former U.S. undersecretary of state, receives an interview with Xinhua in New York April 5, 2018. Xinhua/Zhang Mocheng via Getty Images

Hormats pointed out that the Gulf states eying a post petro-state future “worked for years to establish the notion of stable countries where you can vacation… a nice place to do business, with good laws and tranquility.” They invited in tech giants and built financial hubs. The war has upended that project—and, with it, maybe the confidence those states had in their close partnership with America.

Burt Flickinger, founder of Strategic Resource Group and a veteran consumer analyst, said he sees the attacks on glossy hubs such as Dubai, Abu Dhabi, and Riyadh as a sign things will get a lot worse before they get better. With this war, he said, “you crush the luxury malls, you crush the golf, you crush the sports, you crush the luxury living.” And