Today’s Middle East conflict continues, with no clear end in sight. Still, a careful examination of the underlying forces reveals the broad outlines of what is to come. While we think Birol is not wrong in his characterisation of the crisis, we conclude that the world economy is unlikely to suffer the significant decline in economic dynamism we saw after 1973. Nevertheless, there will be meaningful structural changes in the balance of geopolitical power, the drivers of economic growth and competitiveness, and energy markets, not all of them negative, and some of them quite constructive. The overall impact may not be so bad for our region after all.
Some commentators have argued that the US and Israeli war on Iran will mark a turning point in the global economy as impactful as the 1973 Yom Kippur War between Israel and several Arab states. Fatih Birol, the head of the International Energy Agency and one of the most respected observers of the global energy market, has said that Iran’s blockade of the Strait of Hormuz was “bigger than all the biggest crises combined”, implying that the damage done to the world would be much greater than in the 1970s.
The year 1973 was indeed a watershed moment in economic history. There was a permanent step-down in economic growth rates across the US, Europe and Japan, caused mainly by a sharp fall in productivity growth. Between 1973 and 1980, oil prices rose tenfold, triggering a huge inflationary spike which took many years to reverse. That imposed an immense burden on the less developed oil-importing countries. Oil exporters amassed massive external surpluses, which were recycled through American and European banks into loans for these poorer economies. Much of this lending was badly formulated, eventually precipitating the emerging markets debt crisis of the 1980s.
