The “fear premium” hangs over nearly every unexpected development in the Middle East. Since the whole region is characterized by coups, terrorist attacks and forceful repression, seemingly any crack in social order can spiderweb into bedlam.
Yet there also seems to be a natural limit to how much instability this famously unstable region can export to the rest of the world. And with the United States and at least a few of its allies poised to carry out military strikes against Syria, Western policymakers are about to test their ability to contain hostilities in the Middle East to their country of origin. Recent experience in nearby countries suggests they will succeed, with a Syrian conflict causing lots of immediate worry in global markets but little lasting damage.
The Pentagon has moved warships and fighter jets within striking distance of Syria, while the White House and Secretary of State John Kerry have telegraphed the likelihood of a military response to Syria’s use of chemical weapons in mid-August. U.S.-led airstrikes are likely to target Syrian air defenses, troop emplacements and perhaps much more.
Weak stomach for military conflict
Investors have a weak stomach for military conflict, which is why the prospect of a widening war in Syria has driven prices for Brent crude oil up by about $9 this month, to nearly $116 per barrel — a six-month high. Stock prices have sunk, meanwhile, with the S&P 500 index down nearly 2% in August, although Wednesday is seeing a bit of a rebound in the major indices. Once missiles actually fly, however, it’s a good bet oil prices will spike further and stocks will swoon.
[See related: Investor Fear Builds: Is It Enough to Entice Bold Buyers?]
Syria produces little oil, nor is it a transit point for oil shipments. So attacks on Syria should have no direct impact on global oil supplies. There are two or three other concerns, however. One way Syria and its most important backer — Iran — could retaliate against airstrikes is to sponsor terrorist attacks against oil facilities in Iraq, Kuwait, Saudi Arabia or other major producing nations. Those could be disruptive, but they’d also most likely be isolated incidents that would do little to dent the overall supply of oil.
It would be a much bigger problem if Iran escalated the conflict by trying to block oil shipments through the Strait of Hormuz at the mouth of the Persian Gulf, which is a transit point for about 20% of the world’s oil supply. But that would provoke an immediate U.S. response and “be game over for the Iranians,” says Trevor Houser of the Peterson Institute for International Economics. Considering that Iran backed away from such action when the United States and Europe imposed sanctions on its own oil sales in 2012, it seems extremely unlikely Iran would undertake a suicide mission on behalf of a war-torn ally.
There could also be Syrian-backed cyber attacks on Western oil facilities and other types of infrastructure, such as the apparent effort by Syrian hackers to shut down the New York Times (NYT) Web site. But such attacks would have to be on a massive if not unprecedented scale to have much lasting effect on the global economy.
A likely scenario
What seems more likely is a lot of hand-wringing among investors once air strikes begin, followed by a few high-pucker days in the markets and then a return to relative calm. “I think we’ll get maybe a $10 spike in oil prices the day the strikes commence,” says Houser. “But unless it leads to retaliation that disrupts supply, it would be difficult to sustain price increases for more than a few days.” If that’s how the scenario unfolds, an attack on Syria could be the ultimate buy-the-dip (and short-the-spike) opportunity.
Similar crises elsewhere in the Middle East during the past few years reflect a familiar pattern. At the start of 2011, the price of Brent crude was about $96 a barrel. In January 2011, Egyptian president Hosni Mubarak was driven from office. Then in March, a NATO bombing campaign kicked off in Libya, to aid rebels battling Libyan strongman Moammar Qadaffi. Libya at the time was a sizable oil producer, and the civil war there directly threatened production. So it was no surprise when Brent oil prices hit nearly $127 per barrel near the end of April — a 32% spike from the start of the year.
Oil prices drifted back down, however, slipping below $108 the week Qadaffi was killed in October. They ended 2011 at about $111.
There were similar scares in early 2012 when the United States and Europe imposed sanctions on Iranian oil sales, as part of a campaign to shut down the Iranian nuclear-weapons programs, and Iran threatened to retaliate. Forecasters warned that oil prices could soar close to $250 per barrel if Iran tried to block the Strait of Hormuz. But Iran never did, and oil prices fell below $100 by summer.
The stock market, of course, has weathered all these threats and more amidst a bull market that’s now in its fifth year. The biggest drop in stocks during that time followed not some conflagration in the notoriously volatile Middle East but the U.S. debt-ceiling standoff in the summer of 2011 and the first-ever downgrade in the U.S. credit rating that followed. The world’s supposed model of political stability did more harm to stock prices than revolutions in half a dozen Middle Eastern countries.
Military strikes against Syria would have other costs, needless to say. No matter how carefully planned, they’re likely to kill some Syrian civilians while perhaps strengthening the hand of jihadists who could be hostile toward U.S. interests. In geopolitical terms, Syria will remain a snake pit. But harming the global economy is probably one bit of collateral damage the U.S. and European generals won’t have to worry about.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.