Economic Implications of a US-Iranian War Essay

Some have said that the United States and Iran have been involved in a â€Å"Cold War† for three decades starting with the fall of the taking of American hostages in 1979. One could trace the problems between Iran and the United States to the installation of the Shah in the 1950s. Regardless of the origins, the fact remains that Iran and the United States consider themselves enemies. As such, it is not out of the question that a war between the United States and Iran could break out. This creates a very complex scenario because of the global economic implications of a war between Iran and the United States. Iran is, of course, a major supplier of oil to the many allies of the United States. Japan, for example, is one of the United States’ strongest allies and it receives an enormous amount of oil from Iran. Similarly, many European allies receive imports of Iranian oil. A war between Iran and the United States would have tremendous global implications. Among these many implications would be serious potential negative implications for the world’s economy. Several of these different â€Å"nightmare scenarios† will be explored in this essay. First, it is important to state there are different ways to wage war. Some methods such as supporting the overthrow of the Iranian government via supporting resistance forces might not have the impact of the global economy to the same degree as a series of surgical airstrikes or a ground invasion. In this essay, the subject of ‘war’ will be discussed in its most conventional sense. Specifically, it will be defined as a large scale, drawn out military conflict between the two nations. One of the most strategic areas the United States must consider when it comes to Economic Implications of a US-Iranian War – 2 the issue of a war with Iran is the fact that Iran is completely reliant on the importation of gasoline. Without shipping access, the ability for Iran to maintain its importation of gasoline would be impossible. Of course, it would be to the United States’ interest to enact a naval blockade on Iran to prevent the importation of gasoline. This would almost immediately lead to Iran further rationing its gasoline supply in order to effectively operate its military. While it would not be accurate to state that a naval blockade would immediately end the war (Iran’s navy could attack the US’ navy and potentially reverse the blockade) However, the scenario of no imports or exports would also cripple Iran’s ability to deliver oil to other nations in the world. This would then have potentially enormous economic impacts on the global markets. The notion that there would be serious economic implications resulting from a war between the United States and Iran has been weighed by many serious thinkers. â€Å"earlier in July when Iran tested missiles capable of reaching Israel and other corners of the Middle East, the price —of oil jumped to a new high of over $147 per barrel. In fact, some analysts see the impact of U. S. —Iran relations on the oil market as so important as to suggest the best way to give quick relief to energy consumers around the world is a declaration by the U. S. that military force is not an acceptable option in its dispute with Iran. † (Esfahani) This is why there is so much concern globally regarding a potential United States/Iranian conflict. At the core of mostly all basic economics is the theory of supply and demand. If Economic Implications of a US-Iranian War – 3 the supply of something is limited and high demand remains in place, the price of the item increases. This then creates the issue of opportunity costs. When you buy something with your money, you have eliminated the potential to use that same money for something else. In other words, if the price of gasoline skyrockets and people have to pay more for it, then they will be depleted their cash reserves or increasing their borrowing. Oil is also employed for the production of electricity which would also increase in price in the face of an oil embargo. Once again, the drain on personal finances as a result of such increased energy and fuel costs would cut into every sector of the global economy. Discretionary income would drop and leisure purchases and even the purchases of necessities would diminish rapidly. What would be the effect of this on the economies of various nations? The impact would be felt on a variety of front. The stock market, for example, would experience a great deal of negative impact as a result of such diminished spending. When people are not purchasing, the stocks of many companies may decline. After all, their profit margins could decline. Granted, there are many steps a company can take to make sure its stock price remains stable. For example, reducing the workforce or cutting spending in other areas would aid in boosting stock prices. However, if something is not done to present the lowering of stock prices, economies will take an immediate tumble. Those with investments in the market would see their net worth diminish. If one Economic Implications of a US-Iranian War – 4 sees a 25% decline in the value of their portfolio, they will see a 25% decline in their net worth. Again, this is how simple economics works and such an impact will assuredly be the result of a large scale (or even minor military skirmish) between Iran and the United States. There really would be no way to avoid such a chain of events from occurring if a war broke out between the Unites States and Iran. This is because there will be an enormous impact on the price and flow of oil if such a war was to break out. Such an occurrence could not be circumvented in any way. As one can infer, this ties heavily into the concept of aggregate demand which would be the definitive demand for goods and services in a particular economy at certain specific price levels. As one could logical infer, demand for high priced items in this situation of reduced consumer cash liquidity would certainly hamper purchases of high priced items or items that are not considered of vital importance to one’s sustenance. This can lead to s significant reduction in output – the total value of all services and goods produced in the economy – within a very short period of time. We will see the impact of this in the Mundell-Fleming Model (An aggregate demand model) which would detail the relationship between the inflation of prices combined with the actual output of goods and services. In the simplest of terms, high inflation combined with a slow decline in goods and services could prove cataclysmic for an economy. But, even with high inflation, it would be safe to say that the potential for the Mundell-Fleming model to maintain a high supply of goods and services is possible in the United States. The reason for this is that the various sectors of the United States Economic Implications of a US-Iranian War – 5 economy are so vast that there will be those able to purchase goods and services even at inflated prices. Some professions would not be as significantly impacted by high fuel or energy costs. As such, there may be a certain level of maintained stability within model even though a large section of the population may still be suffering. Issues surrounding a war with Iran are complex and far reaching. This includes the actual manner in which the war would be waged. Considering the size of the US and Iranian military, no option would be off the table in terms of how the war would be waged. Case in point, the utilization of tactical nuclear weapons by the United States may be necessitated. This is not to say that tactical nuclear missiles would be a first response or that they would be directed towards civilian targets. However, there are possibilities that could necessitate the use of such weapons by the United States. For example, Iran has tens of thousands of cruise missiles. The threat of launching thousands of these missiles into Israeli cities, European cities, or neighboring American military bases would potentially require the detonation of the missile silos with tactical nuclear arms. A wide scale Iranian invasion of neighboring countries such as Iraq could require a tactical response. Use of chemical weapons by Iran would constitute a WMD attack and lead to a nuclear response. Really, there are many different variables at work here. Again, this is not to say that a war between the United States and Iran would automatically lead to nuclear strikes. However, the potential for such strikes exist in any large scale military conflict. This would have a devastating impact on the world economy Economic Implications of a US-Iranian War – 6 for a number of reasons. The possibility of a nuclear strike destroying oil fields would be a potential scenario. The presence of radiation reducing the amount of work that can be performed on oil wells is another. Such scenarios are grim when discussed in an antiseptic manner. In the decades since the detonation of the atomic bomb in Hiroshima, the horror of a nuclear strike’s effects have not been dulled on the senses of people. However, the specter of the potential use of such weapons is always present. As such, the impact – both human and economic – must be weighed. Because of the potential for a tactical nuclear strike leading to arms races in the region (Other nations will want their own nukes as a deterrent to future strikes), the need for a significant conventional force is required. This means the war will have to be funded to handle a long campaign and potentially significantly longer post-war rebuilding phase. This will cost significantly in terms of government expenditures which, in turn, means the deficit will skyrocket. With very high, out of control deficits, a number of seriously negative economic situations could develop. First, a debtor nation may not be able to provide for the common good of society. As such, it must take steps to reduce the impact of the deficit. One method involves printing more money and the other process involves increasing taxes. Both methods have the potential for significant economic harm. When a nation prints more money in order to meet obligations tied to a deficit, it the value of the currency will decrease. A weakened dollar comes with many problems. Economic Implications of a US-Iranian War – 7 Namely, investment is seriously hampered since the dollars that you amass are worth less. Additionally, there will be a disinclination on the part of foreign investors to put their money into the US market. There would be limited value for their doing so since the dollar is declining meaning their investment capital in dollars would potentially decline as well. Debt holders of US bonds would also become more nervous since they would be losing money on their investment. As pointed out in BUSINESSWEEK, â€Å"As the currency deteriorates, it becomes more expensive to import goods and services from other countries, fueling inflation. In an effort to pull investors back, central banks often raise interest rates when their national currencies lose value. But as anyone who remembers the ’70s knows, the combination of rising interest rates and on-the-run inflation can be a devastating economic cocktail. † (Rosenbush) In some cases, foreign investment is critical for the spurning of employment and economic growth. With foreign companies opting to avoid putting their money into the United States, the unemployment could increase which further raises deficit potential. This is due to the fact that more unemployed people means less tax dollars paid to the government. Additionally, unemployment creates greater dependency on welfare which also contributes to higher deficits. All of this further sets the stage for inflation which makes goods and services less affordable to the public. This further damages the economy and adds to the deficits. Tax Economic Implications of a US-Iranian War – 8 increases are commonly pointed to as a solution, but their value is limited. When money is taken out of the private sector and placed in the treasury, it makes job creation harder. This, in turn, makes economic recover more difficult as well. If an economic recovery if difficult to expedite, then it becomes much harder to get out of it. That is because the sheer volume of economic pain induced by the many months or years of poor economic factors and growth create complexities and problems that multiply. Again, this makes reversing a poor economy more difficult. As such, some may wonder why the United States’ policy towards Iran may be so hard lined. The reason is that not treating Iran as a threat could prove equally harmful to economic and security interests. Iran’s agitation towards the United States prime allies is not helpful for US strategic security. Also, Iran’s potential domination of the other oil countries in the Middle East does not appeal to US economic interests. As such, there will be perpetual tension between the two countries. Hopefully, such tensions will not lead to war but preparedness for such actions is required. Considering the economic impact of such action, war should be the perennial last resort or option to be executed. So, far it has been averted and will hopefully remain averted for the foreseeable future. Most do not tie the economic ramifications to military action. However, the two are intertwined. Wars need to be funded and there are additional economic costs associated with military action. This is why sensible nations do not rush to war and as well they should not. But, this does not mean a nation should not prepare for the potential worst case scenario.While the US is not is a rush to engage Iran militarily, it understands the potential for such a conflict needs to be adequately prepared for. Works Cited Esfahani, e. (2008, September). The Economic consequences of us-iran relations. Retrieved from http://www. ideals. illinois. edu/bitstream/handle/2142/9093/ policy_brief. esfahani. final. pdf? sequence=2 Rosenbush, S. (2004, November 12). The Pros and cons of a weak dollar. Businessweek, Retrieved from http://www. businessweek. com/bwdaily/ dnflash/nov2004/nf20041112