The push for global economic restructuring from the Middle East conflict

The conflict in the Middle East has lasted more than 2 months, causing many casualties and economic damage, causing the impact to spread throughout the world. However, many analysts believe that the world is likely to undergo some necessary and structural changes because of this conflict.

The Strait of Hormuz will no longer become a choke point for the global economy and Iran is unlikely to disrupt the world oil market. The stronger the economic decline, the greater the motivation to make necessary changes.

It is unclear what agreement the sides can reach to end the fighting. Still, economists and military experts say the conflict could still have some positive long-term outcomes.

The war has exposed major structural weaknesses in the global energy supply chain – a complex system that requires a balance between efficiency and redundancy. Iran’s disruption of 20% of the global oil supply with mines, homemade drones and speedboats shows that the world will have to seriously reevaluate and make lasting changes.

The most feasible scenario is that the Middle East builds more oil and gas pipelines through Saudi Arabia and the UAE to completely avoid the Strait of Hormuz. “Countries will develop pipelines and sharply increase transportation capacity. At that time, no one will bet their entire future on this strait anymore. This is very positive,” said Jay Hatfield – analyst at Infrastructure Capital Advisors. CNN.

This also means the energy supply chain can be safer and cheaper in the long term. The world is paying very high insurance premiums to transport goods through tense seas.

“If there were no war or shock like the recent one, it would be difficult for people to realize things need to change,” said Ross Mayfield – investment strategist at Baird.

Economies shifting to adapt have happened several times in the past decade. After the pandemic, the global supply chain was broken, but has been significantly strengthened. The Russia-Ukraine conflict changes the way Europe buys natural gas. US President Donald Trump’s import tariffs also created major changes in raw material purchases.

Energy supply chain resilience is even more essential at a time when global fuel demand is growing rapidly. Many technology companies are building AI data centers, which consume huge amounts of electricity at a breakneck speed.

If the world reduces its dependence on Middle Eastern energy, the United States could benefit. Natural gas is still the largest source of energy for electricity production. The US possesses huge gas reserves and growing export capacity.

According to Joe Brusuelas – chief economist at RSM, the impact of changes in the global economy will only be clearly visible after 10-20 years.

In fact, OPEC – America’s biggest rival in the fossil fuel sector – has shown signs of cracking. The UAE, the second largest oil producer in the group, left the alliance. This weakens OPEC’s ability to influence world oil prices through production quotas.

“Diversifying supply away from OPEC and toward more reliable suppliers, especially the US, helps improve global energy security and price stability,” said Rob Thummel – Portfolio Manager at Tortoise Capital.

Besides, the transition to solar energy is also accelerating in many regions due to the oil price shock. China’s exports of solar technology, batteries and electric vehicles all set records in March, according to energy research firm Ember. “An economy less dependent on energy sources will be a positive thing,” Mayfield assessed.

However, these positive scenarios are unlikely to happen. The new government in Iran may be even tougher than the current one. The war shows that Iran knows how to put pressure on the global economy. Heather Long – chief economist at Navy Federal Credit Union said that if the Strait of Hormuz is no longer so important, this country and its allied forces may move to threaten other shipping routes in the future.

Besides, OPEC recently increased oil production. The alliance’s disappearance could also reduce the world’s ability to coordinate action in future energy crises.

Finally, changes resulting from hostilities may benefit one side at the expense of another. For example, the transition to renewable energy, especially in Asia and Europe, could negatively affect shale oil exploitation areas in Texas (USA). If oil demand declines in the long term, oil prices could drop lower than in the pre-war period, causing damage to the industry.

“A lot depends on what factors are long-term, and what are just temporary,” Brusuelas concluded.