“The biggest risk, as always” – According to the economist, the worst threat to Iran’s situation is somewhere else than the price of oil

Spanish economist, professor of global economy Daniel Lacalle anticipates that the ongoing energy crisis may prove to be significant, but will remain short-lived.

He foresees in the fresh on his blog that the price of crude oil will calm down to 80 dollars per barrel by the end of the current year. According to the professor, the bigger risk than the price of oil is how politicians react to the situation.

“In the worst case scenario, a new energy crisis triggered by a war with Iran would bring stagflationary pressures to the entire global economy, especially in economies that have not been able to strengthen their energy supply chains after 2022. One of them is the European Union, which is still in a low-growth environment that is significantly affected by energy crises,” he writes.

According to Lacalle, the situation will hit countries and regions that import a lot of energy the hardest, i.e. the EU, Japan, South Korea, Taiwan, India and parts of Latin America. In addition, higher fuel bills are likely to hit households that are already suffering from ongoing inflationary pressures.

According to Lacalle, the worst option that politicians will probably take is different support mechanisms.

“If governments decide to ‘fight’ the energy crisis by increasing public spending and subsidies, which is the same as printing money, the macroeconomic impact would be stagflationary: higher inflation and weaker or non-existent economic growth. The biggest inflationary risk is not only the effect of energy prices, but also the reaction of governments if they decide to spend and print their way out of the effects of war,” he warns.

Italy, the third largest member state, was the first EU country to do so, and this week introduced a mechanism to limit the increase in the price of a liter of fuel, which is partly based on a reduction in excise duty.

However, according to media reports, it has not worked as expected. The goal of Giorgia Meloni’s government was to cut fuel prices by 25 cents per liter for 20 days, but most of the distribution companies have not lowered their prices.

Daniel Lacalle says that, in addition to all this, a significant risk threatening the entire world economy would arise if central banks decided to raise key interest rates due to energy price spikes.

“Raising interest rates would stop investment, consumption and job creation, and would have no effect on prices driven by an external geopolitical factor. The biggest risk now, as always, is the domino of political mistakes,” he says.