Opinion
Cold War II: The world needs to minimize hot eruptions in West Asia
Summary
- Oil prices might have softened a bit after Iran’s attack on Israel, but don’t under-estimate the risk of a flare-up in this volatile region. To ensure the global economy isn’t disrupted, the US must mount a credible push for lasting peace.
Investors are well aware that every war heightens uncertainty. It entails risks that are hard to price, as they defy probability estimates. A recency bias, however, must not get the better of us on the disruptive potential of hostilities in West Asia, where Israel’s night-sky was lit up on 13 April by the flares of aerial strikes by Iran in retaliation to an attack on its consulate in Syria. With the Gaza War proving hard to abate, it was something of a relief that Tehran’s spectacle of drone-and-missile attacks was ably fended off by an Israeli air-shield operating in alliance with the US and others. At the United Nations (UN), Tel Aviv was offered a chance by Tehran to call the score level and end the slugfest, and since Israel took only a minor blow in this mutual exchange of fire-power, it can claim an upper-hand and take that olive branch. In fact, this is what the US, in its effort to forestall an escalation, is reported to have advised Tel Aviv. Although Israeli hints of hitting back—to stiffen its deterrence, perhaps—have not sent oil prices flaring and inflation forecasts have held firm, so far, we must not under-estimate the likelihood of today’s Cold War II turning too hot to handle. The world economy may yet turn out to be less war-proof than assumed.
Oil stability tempts the view that shale-oil rigs in the US and a progressive squeeze on fossil fuels for climate action are reducing the relevance of West Asian wars. True, the US matches Saudi Arabia as an oil supplier today, and last year’s eruption of the Israel-Palestine dispute was only a faint echo of the oil shock half a century earlier. Still, energy forecasts suggest that carbon pricing will give cheaply extracted West Asian oil a cost advantage and so every path towards a phase-out would raise its relative value till the time it’s finally choked off. In other words, we cannot count on a fade-away. On the contrary, what’s evident are the rising stakes of geopolitics in this region amid a new Cold War, with Tehran and its proxy militia in cahoots with Beijing and Moscow ranged against Washington and its allies. While Hamas’s terror outrage of 7 October 2023 may have been timed to mark 50 years of the 1973 Arab-Israeli war, it also came soon after a project was declared for a new trade route from India to Western markets via the Arabian peninsula and an Israeli port, Haifa. Whether another ‘great game’ is afoot is open to speculation, but the possibility of a big challenge to US authority means we can’t overlook other scenarios: of rebellions being stirred up against US-allied governments in the region, for example. In 2001, taut nerves over Israel’s treatment of Palestinians, raked up even at the UN summit on racism in South Africa, had preceded the 9/11 terror attacks in America that provoked the Iraq War. The legacy of US hard-power actions adds to the region’s volatility.
In the latest episode, oil markets had priced in worse, which explains why prices softened a bit in the wake of Iran’s barrage against Israel. Yet, the ideal way to de-risk the region durably would be for the US to display even-handedness in a conflict going back to 1948 by helping alleviate the plight of Palestinians. This would make it harder for America’s adversaries to mobilize forces against its interests (and world order). For its pitch of ‘Pax Americana’ not to ring hollow in West Asia, US President Joe Biden should show statesmanship. Calm oil prices don’t relieve the US of its need to make a credible push for permanent peace. Helping end the Gaza War would be a good start.
