An unnamed “decision-maker” – presumed to be Ehud Barak, the defence minister – told the Haaretz newspaper that Israel could not afford to wait for the US to act. “We need to look at the reality right now with total clarity,” he said. “Israel is strong and Israel is responsible, and Israel will do what it has to do.”
If so, the three months before the US presidential election in November provide the obvious window for an Israeli strike. The impression given is that the world may be a few weeks away from another war. As for the possible consequences, Israel’s outgoing civil defence minister says that any conflict would take place “on a number of fronts”, lasting for 30 days and costing about 500 Israeli lives.
--Daily Telegraph, Aug. 16th, 2012
Since 9/11 and the Lehman crisis, we have been advised to be on the lookout for economic “black swans”, meaning unexpected events of large magnitude*. One particular swan has been flapping around our heads with increasing urgency these days, namely the Israeli government’s hints that it intends to attack Iran this fall.
Without getting into motives and probabilities, let’s assume that this will happen. Let’s also assume that a Gulf War III will close the Persian Gulf for a considerable period of time. Iran can keep the Gulf closed indefinitely, since marine insurers won’t cover war risks in a war zone. Iran herself can’t export under such a scenario, but that could be a secondary consideration in the eyes of an angry people.
As we know, the short-term demand curve for oil is price-inelastic, because the ratio of stored oil to daily consumption is low. The world economy is designed around the presumption that the oil pumps are on all the time; there are no readily-available inexpensive substitutes in the short-to-medium term. Therefore, in the event of another oil shock, the price mechanism would have to be used to bring oil consumption down by 25% almost immediately. The price of oil will be set at the margin by those who must have it, can’t produce it, and can afford it at any price. Bad news for the emerging markets, and really bad news for Greece.