Global Recession: The Damage Has Been Done

For economists, the ongoing Iran War is the “supply shock” to the global economy that has the potential to throw the whole world into economic recession. It may come next year or the following one, but the scope of the war’s significant cut (about 20%) in the available energy supply could have dire consequences.

As discussed in an earlier column, the destruction by Iran of oil and natural gas processing facilities and export terminals in countries around the Persian Gulf area was a desperate act of indirect retaliation: unable to reach the U.S. with its missiles, Iran attacked our friends and allies in its own neighborhood.

Qatar, a Connecticut-sized nation along the southwestern coast of the Persian Gulf, has given estimates of up to five years for reconstruction of its destroyed facilities. A minor player, with production of approximately 2% of the world’s energy sources, its forecast, nevertheless, is a good indicator of what its neighboring countries also face in terms of bringing back the level of 2025 production capacity.

Five years is an eternity for the poorest of the poor countries in the world, most in South Asia, Africa, the Caribbean, Oceania and Latin America. Prices of cooking fuel; fuel for “bush taxies” (rural transportation); diesel for trains, buses, and trucks; heating fuel; fuel for electric generation: all have increased as supplies dropped, at least as much as gasoline and diesel prices here in the U.S., if not far more.

In addition to the fuel industry, industrial/manufacturing capacity in all countries will be affected for anything that uses oil or natural gas derivative products as inputs: synthetic fabrics (such as polyester), plastics of all types, fertilizers, detergents and cosmetics, pharmaceuticals, and on and on the list goes.

Even countries that are mostly self-sufficient in energy will nevertheless be affected, for although they may rely on water-generated or geothermal sources for electricity and other energy needs, their manufacturing processes for clothing, food packaging, agriculture and medical supplies will still be affected by the changes in availability of oil and gas, along with their derivatives (so-called petrochemicals).

Many people might conclude from all this that we would be better off in isolation. As a matter of fact, President Trump campaigned on a platform that might have led many to believe he favored that position. It’s hard to wield power and influence from such a position, however, and our country has much to offer the world, in terms of exports, expertise, and even compassion, if we are of a mind to provide it.

The isolationists were most powerful in the United States after World War I, when their argument was that we should leave Europe to its own wars, but that only lasted until the attack on Pearl Harbor. Similar sentiments might have held sway in the late 1900s here, but the 9/11 attack on theTwinTowers in New York City (2001) put an end to that era.

So here we are, possibly facing a major world-wide recession, with almost no way to avoid it, policy-wise: the damage has already been done. While the fiscal and monetary policy wielded by Congress and the Federal Reserve can be used to increase or decrease demand in the economy, their tools are more or less useless for supply shocks.

It’s time to buckle your seatbelts, dear readers. We may well be, I fear, in for a challenging few years ahead economically. It might be really important to cultivate that “singing bird” on the “green bough in your heart” referred to in my previous column.