Cold War II: The world needs to minimize hot eruptions in West Asia
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.
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