There are no guarantees that an Iran-US deal will ever come to fruition, either way the economic damage to the global economy is real and lasting.
Michael Roberts is an Economist in the City of London and a prolific blogger . Cross-posted from Michael Roberts’ blog Picture by MODIS Land Rapid Response Team, NASA GSFC Financial markets and the world in general let out a sigh of relief when Iran and the US finally agreed a 14-point Memorandum of Understanding (MoU) that, if impemented fully by the middle of August, would end the war in the Middle East and allow crude oil, fertilisers and other petroleum products to be transported unhindered through the Strait of Hormuz to markets in Europe and Asia.
Trump hailed the MoU as a victory, because after more than two and half months of conflict, the Strait of Hormuz is set to reopen, prompting oil to flow again. In reality, the proposed MoU between the US and Iran merely returns the status of the Strait of Hormuz and Iran’s nuclear capability to where they were before the US and Israel launched their ‘war of choice’ on Iran on 28 February with ‘epic fury’. About a week into that war, Donald Trump pledged that there would be no deal with Tehran except “unconditional surrender!” However, Iran’s resistance, its missile attacks on the Gulf states and its strangehold on the Hormuz Strait turned that demand into dust. Meanwhile the global crude oil and gas prices rocketed by 50% and strategic reserves of oil globally fell towards the bare minimum for continued operations. The US strategic oil reserves are currently at their lowest level since 1983. If the war had continued into the summer, it would have caused an energy catastrophe and economic slump in many economies. On signing the MoU in Versailles Palace in France at the G7 summit, Trump admitted as much. “There is nothing as smart as the market – and the market loves it,” he said. Without the agreement, “the alternative would be a worldwide depression.” The ceasefire deal harks back to Versailles in 1918, when the German high command signed an armistice with French-British-US alliance that amounted to total surrender and huge reparations. This time, it appears that Trump has signed a deal that in no way means Iran’s surrender – on the contrary, it appears that the deepening crisis of energy prices in the US and globally has forced Trump to make significant concessions to Iran in order get the Strait of Hormuz open again. The ceasefire plan may eventually lead to agreement on reducing Iran’s nuclear stockpile. Iran has a stockpile of more than 9,000kg of the material, including 440kg at levels close to weapons grade that Trump previously demanded Tehran hand over to the US. The MoU sets out a “minimum” for the diluting of the stockpile on site, under the supervision of the International Atomic Energy Agency. Actually, Iran has already pledged on many occasions that it does not seek to have a nuclear weapon. President Trump acknowledges that Tehran can keep its ballistic missiles. As he said: ‘They have to have some, because other people have some.” All trade and financial sanctions on Iran are to be removed and Iran will be able to sell its oil in international markets. As for the seizure of Iranian reserves and funds, Trump said. “We have taken their money, it’s their money,. If we didn’t give it back, nobody would ever invest in the dollar again.” Also, “if we did not remove the sanctions, there would be poverty. Then 91mn people would starve ”.
In addition, it has been agreed to end conflict on all fronts, including between Israel and Lebanon. There is a US pledge to respect Iran’s sovereignty and not interfere in its internal affairs. US forces will withdraw from the region within 30 days after the final agreement. And subject to progress on reducing Iran’s nuclear stockpile, the US has agreed to set up $300 billion reconstruction and development fund for Iran. But there are many caveats to the prospect of a final deal in the next two months and the maintenance of any permanent agreement beyond August. First, will Israel obey Trump and cease its attacks on Lebanon? If it does not, Iran says it will not sign any final agreement. The interim agreement calls for a cessation of hostilities on all fronts, including Lebanon. But neither Israel nor Hezbollah are signatories to the deal. It has been fiercely criticised by Israeli ministers, who argue that it stops Israel countering threats posed by Hezbollah. Israeli forces have continued operations in Lebanon despite the MoU terms. As a result, Iran is threatening to close the strait of Hormuz again after the latest wave of Israeli strikes in Lebanon and will refuse to discuss a permanent agreement during the 60-day ceasefire.
Israel will hold elections in October and Prime Minister Benjamin Netanyahu is in severe danger of losing because the deal is widely perceived in Israel as favouring Iran. Israel has been in a state of continuous, multifront conflict since the 7 October Hamas attack. Now it is trying to establish a permanent military footprint and buffer zones in Gaza, Lebanon and Syria. That will only drive Hamas and Hezbollah to continue their resistance and lead to a breakdown in the agreement.
Second, if no agreement is reached on Iran’s nuclear capability, then the US will revoke the MoU. Intensive negotiations over Iran’s nuclear program, the most contentious problem, are only just beginning, and the gap between the two countries remains wide, and the situation is still highly uncertain. The interim deal gives negotiators 60 days to come up with a nuclear agreement but that can be extended. But it will be very hard to reach an agreement on such a complex issue within two months. The 2015 nuclear deal, which Trump scrapped during his first term, took more than 18 months to negotiate.
Third, even if a full agreement is reached and sustained after August, the pressure for renewed conflict is high. It is not only the Israelis who are furious about Trump’s capitulation; the ‘globalists’ in the US ‘deep state’, like the CIA and other security forces, along with a sizeable section of Republicans and Democrats in Congress, want to renew the war and ‘finish off Iran’. Such is their pressure on Trump that he continually swings between claiming a deal to threatening more bombing and even the assassination of the current Iran negotiators! There is every possibility that, once the US Congress mid-term elections are over, Trump may revoke the agreement and take ‘revenge’ on Iran before he leaves the scene in 2028.
But for now, the tankers are finally starting to move through the Strait of Hormuz, crude oil prices are falling (from $100/b during the crisis to about $75/b now – that’s still well above the $60/b before the war started, but the downward direction is clear). Indeed, with the build-up of blocked supplies being released, there is every prospect of the global glut in oil rather than a shortage! It may take months for things to get back to full speed given the fragility of the US-Iran accord, snarled-up logistics and damaged infrastructure. But once flows resume properly, there will actually be a lot of extra oil in the system. The production boost from the Middle East would come on top of an already oversupplied world: a veritable flood of new projects, largely in Brazil, the US and Guyana, which will add 2.8mn b/d in 2027, according to Wood Mackenzie analysis.
However, the world economy is not likely to recover from this energy shock as quickly as it happened. The global energy supply chain will take considerable time before energy shortages, particularly in Asia, return to pre-conflict conditions. So e nergy prices could take several months to ‘normalize ’, if ever. Clearing mines laid by Iran will be a time-consuming process, while vessels stranded around the strait will not immediately resume normal operations. Repairing infrastructure damaged during the conflict also poses a major challenge. And we must not forget the cost in human lives and civilian infrastructure in Iran. At least 3500 Iranians have been killed, with thousands more injured, and schools and water facilities have been destroyed. Israel’s operations in Lebanon have also killed thousands of people there and have displaced close to a fifth of the population.
Most important for the global economy, the lasting effects of this war will be felt for some time in rising inflation of consumer prices and weakening economies (particularly in Europe and also in Asia). This will only accelerate the trend to stagflation. Annual consumer price inflation in Europe, the US and Asia is still accelerating (US: 4.2%, Eurozone 3.2%, India 3.9%). American vehicle drivers are now paying $1 a gallon more for petrol than a year ago– news that Trump greeted by claiming: “I love the inflation”! Trump’s newly appointed pick as Federal Reserve chair, Kevin Warsh, was chosen in the hope he would deliver a string of interest rate cuts. Instead, Warsh is likely to face pressure to raise borrowing costs in the coming months. Dario Perkins, the head of global research at the consultancy TS Lombard, said that of the leading central banks, “as the economy has remained strong and inflation has increased, the Fed is probably going to increase rates the most, maybe as much as four times (to a range of 4.5% to 5%) by the end of next year.” In the EU, which is heavily reliant on gas imports, the European Central Bank (ECB) has already raised interest rates for the first time since 2023, in the hope of choking off surging inflation. As I have explained before , central bank monetary tightening will do little to ‘control’ inflation’ especially driven by supply-side energy shortages. But rising interest rates could trigger a financial crash and puch economies into recession. Europe and Japan are already virtually stagnating. The US economy is somewhat stronger. Corporate profit margins are high and profits continue to grow, while AI investment bubble drives on financial markets. But if inflation stays high and rises further and the Fed launches a series of rate hikes, that could change the picture. Elon Musk’s Space X share offer (IPO) provides an early indicator. In the huge IPO launched last week, SpaceX shares were listed at $135 each. They rocketed to $175 within hours. However, yesterday, the share price plummeted by over 16% to $154. Why? Because of the increased talk of Fed action on rates, rising inflation and higher borrowing costs, as represented in bond yields. And the squeeze on energy and other key products caused by the war will continue to exert downward pressure on economic expansion in the major economies. In its latest June report on global economic prospects, the World Bank paints a very dismal forecast. Global growth will slow to 2.5% this year, the slowest rate of growth since the pandemic. “ The 2020s is turning out to be a lost decade.” Growth in advanced economies is forecast to slow this year, to 1.5 percent from 1.8 percent in 2025, mainly due to the lasting impact of substantially higher energy prices. “ The emerging market and developing economies (EMDEs) face the weakest per capita income growth since the pandemic. The level of per capita income across EMDEs excluding China and India, relative to advanced economies, is not expected to return to the pre-pandemic level until after 2028, implying nearly a decade of lost income convergence.” The Gulf economies, which have seen exports of their main revenue-raiser choked off and found themselves the target of Iranian bombs, are heading into slump now, with GDP in the region expected to decline by 2.6% this year. Amid one of the densest clusters of global shocks since the 1970s, nearly one out of every two developing economies has failed since 2019 to advance on the most rudimentary promise of development: narrowing the income gap with the world’s most prosperous economies. “For light at the end of the tunnel, you’d have to look to the 2030s.”! This short war may also change permanently the balance of forces in the Middle East. States in the Middle East are coalescing on two opposing sides. On one side is the Abrahamic coalition, anchored by Israel and the United Arab Emirates, which is aligned closely with the US. On the other side is an Islamic coalition, which is anchored by Sunni heavyweights such as Saudi Arabia , Turkey, Pakistan, and increasingly Egypt. These regional middle powers are still compliant with US imperialism, but they have moved closer together in response to perceived threats coming not just from Iran but also from Israel, as it projects its power beyond its borders in Gaza and the West Bank. So one geopolitical outcome of this war is a more polarized and fragmented Middle East in which rival coalitions harden. Meanwhile, both Trump and the globalists will turn back to their main geopolitical strategy: strangling China’s economy and its influence globally, with the ultimate aim of regime change in that country. ---
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