Tehran [Iran], April 8: Kevin Kelly is in a tough spot. What he says are unprecedented price increases in the weeks since the United States waged war on Iran mean the Californian, who makes plastic bags for groceries, may have to break contracts he cannot afford to honor with hiscustomers.
Thousands of miles away in India, gas shortages have closed dozens of plants that export aluminum products around the world. In the United Kingdom, some farmers are eking out their fertilizer stocks as prices soar.
With the war in its sixth week and almost a fifth of the world's oil supplies affected by Iran's limits on shipping through the Strait of Hormuz, consequences are spreading from financial markets into business activity, raising risks of a global economic pullback or even recession.
Kelly said sharp jumps in the cost of plastic resin over a couple of weeks, from 45 cents to 85 cents per pound, meant it would be economic suicide for Emerald Packaging, his $92 million-a-year family-owned business, to keep the prices agreed in pending orders.
"We'll just declare force majeure," he said during an interview at his factory in Union City near San Francisco.
When a company declares force majeure, it is telling customers it cannot deliver on contracts due to factors beyond the company's control.
"The increases are so high, if we were to lose a customer because we pass them through, we just have to let them go," he said, adding that he expected most of his long-standing clients would understand and accept the changed terms.
Countries in Asia and Europe are more exposed to the fallout of the Gulf energy shock than the United States. However, analysts say a pullback among American consumers is inevitable as inflationary pressures rise.
In a sign that the problems faced by Emerald Packaging are more widespread, prices paid by businesses for inputs increased by the most in more than 13 years in March.
Goldman Sachs has raised its view on the risk of a US recession to as much as 30 percent.
US President Donald Trump has kept investors on edge by talking up negotiations with Iran while threatening to destroy its civilization and send it back to the Stone Age with intensified attacks, including on its bridges and power plants.
He warned Iran could be "taken out" if it did not meet a Tuesday night deadline to reach a deal.
Benchmark Brent crude cost about $109 a barrel on Tuesday and has remained above or around $100 for more than three weeks, up more than 50% from about $70 just before the conflict began on February 28.
Risks sharpen for the global economy if oil moves above $110 or $120 a barrel, warned Nathan Sheets, chief global economist at Citi and a former U.S. Treasury Department official.
"As this shock gets bigger and bigger, the risks of recession are rising significantly," Sheets said.
"There are likely some thresholds where certain kinds of economic activity no longer are justifiable, and you have a sharper, more nonlinear pullback."The war, if it persists or escalates, is likely to test the trigger price at which the world's demand for petroleum is forced into line with its suddenly constrained supply. That means a contraction in economic activity.
If the current disruption to supply is sustained, 13 analysts polled by Reuters forecast an oil price of between $100 and $190 per barrel for the year.
Attacks that have severely damaged refineries, ports and oil storage in the Gulf region mean energy supplies could take months to return to previous levels even if combat ends, meaning a sustained period of higher prices, according to state-run oil and gas companies in Kuwait.
Even if the conflict is swiftly resolved, the International Monetary Fund is set to reduce its forecast for global economic growth and raise its outlook for inflation, IMF managing director Kristalina Georgieva told Reuters on Monday.
Roughly 20 million barrels of oil and refined products had shipped out of the region each day before the war. Only a fraction of that is now reaching global markets through alternative pipeline routes.
"A disruption of this size is going to require significant demand destruction in order to balance the market," said Travis Flint, an investment-grade credit analyst with Columbia Threadneedle.
He compared the situation to the COVID-19 pandemic.
Whatever the scenario, the impact will not be spread equally. In the energy import-dependent United Kingdom, the Organisation for Economic Co-operation and Development cut its forecast for British economic growth this year to 0.7% from a previous forecast of 1.2%, the biggest downgrade of any major economy.
For cut-flower farmer Matthew Naylor in England's East Midlands, rising fertilizer costs and limited supply mean tending his fields with stocks he has on hand.
He had heard talk, he said, of other farmers assessing whether more money was to be made selling their fertilizer than growing crops.
"The best thing we can do is to be very, very economical with what we have and just to hope that sense prevails internationally," he said.
In parts of Asia, the shock is hitting hard.
In India's Gujarat, many aluminum extrusion plants shuttered "four to five days after the war started due to unavailability of gas," said Jitendra Chopra, president of the Aluminium Extrusion Manufacturers Association of India.
India is a leading exporter of the metal product used in construction, solar panel frames, transportation equipment and consumer goods, and its problems could over time lead to higher global prices.
In contrast, the world's two largest economies may hope to fare relatively well.
China, with low dependence on Gulf oil and a highly electrified economy, looks better positioned than peers to weather the global shock.
Meanwhile, the United States, now a net energy exporter, is less likely to face supply constraints.
Rising costs have a two-sided US impact, hurting consumers but benefiting domestic energy firms, potentially boosting pay for energy sector workers and creating jobs.
The US economy "has weathered plenty of storms over the past six years, and assuming the war concludes relatively soon, it should withstand this one," Matthew Martin, senior USeconomist for Oxford Economics, wrote in a recent analysis.
He warned, however, that the duration of the war was critical.
"The longer it persists, the more likely something breaks and the economy heads toward a downturn," he wrote.
So far, U.S. consumer spending is holding up.
Recent Bank of America credit and debit card data showed card use had grown 4.4 percent year over year for the week ending March 21.
Excluding gasoline growth, that was a more muted 3.6 percent , with spending among lower-income households even more devoted to rising fuel costs.
In coming weeks, the hit to family budgets in the world's largest economy is likely to be felt across food service, travel and lodging industries, both from gasoline prices that have jumped roughly 30 percent, from below $3 to more than $4 a gallon, and from falling equity values that influence spending decisions among wealthier households.
Even with many US households benefiting from larger-than-usual tax refunds due to laws approved last year, spending growth was likely to be about 1% this year, less than half of last year's pace, with "a growth scare" likely over the next few months, Sam Tombs, chief U.S. economist with Pantheon Macroeconomics, said in an analysis.
"It would be astonishing if discretionary services spending held firm over the next couple months, given the squeeze on households' cash flow," Tombs wrote.
Kelly, the factory owner, expects price increases in the plastics industry to keep coming right through the summer.
"You could end the war tomorrow and it's still going to happen" because there is so much plastic caught up in the Middle East, he said, as he stood by giant rolls of material at his plant.
"We've created huge problems for ourselves that are going to play out over the next several months," he said.
Source: Qatar Tribune
