Economic Analysts Wary As Israel-Iran Tensions Rise

As the world watches to see if Israel will strike at Iran's nuclear facilities, few have a greater interest than Iran's Arab Gulf state neighbors. The region largely weathered the latest economic slump, but analysts say a fragile recovery could be destroyed by a prolonged conflict and even a relatively brief war could be a significant setback.

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The possibility that Israel may launch an attack on Iran's nuclear facilities has sparked heated debate, and not only in policy circles. Analysts in the Persian Gulf region - and beyond - are contemplating the economic impact of a military conflict. NPR's Peter Kenyon just returned from a trip to the Persian Gulf, and has this report.

PETER KENYON, BYLINE: Earlier this month, the Israeli press reported that the country's financial system was engaged in planning for what Bank of Israel Governor Stanley Fischer called a scenario of all-out war. His comments ricocheted through the global financial media. Fragile, wobbly, extremely uneven - these are typical descriptions of the world economic recovery this year. So as Israelis debate the existential threat of a nuclear-armed Iran versus the costs and repercussions of a military strike, anxiety about economic consequences has grown; not least among Gulf Arab states, most of which have weathered the economic downturn relatively well thus far.

By far, the greatest economic risk involves the 20 percent of world oil that passes through the Persian Gulf and the Strait of Hormuz. Tehran has threatened to close the strait if Israel, or anyone else, launches a strike. Analyst Riad Khawaji, in Dubai, says Iran may be loathed to provoke a wider conflict because its own economy would almost certainly be devastated. But even a limited retaliation could do serious economic damage in the region, and beyond.

RIAD KHAWAJI: The impact, internationally, will be big. You know, hitting one tanker will be enough to send oil prices skyrocketing, even exceeding $200 a barrel.

KENYON: Some analyses estimate that if oil hits $150 a barrel, the U.S. economy could regress from sluggish recovery to recession. Khawaji says if the conflict continues for a period of weeks, the economic pain will multiply in ways that will become harder and harder to recover from.

KHAWAJI: The heavy air strikes will likely bring civilian air traffic to a standstill. And then we will have diversions; we will have closure of airports; we will likely see exodus of expatriates living in the region outside. So the effects of such a war, on a socioeconomic level, are extreme - and big.

KENYON: In Bahrain, spokesman Sheikh Abdul Aziz Al Khalifa says there are other things to worry about, such as damage to Iran's Bushehr nuclear plant, which he notes is closer to Bahrain than to Tehran.

ABDUL AZIZ AL KHALIFA: The waters of the Gulf would be contaminated. We, in Bahrain, would be affected. A lot of our desalination plants are on the coast of the Gulf. So we are very concerned.

KENYON: There is a somewhat brighter view that holds that economic pain from a limited and fairly brief conflict in the Gulf, may subside relatively quickly. Mustafa Alani, at the Geneva-based Gulf Research Center, says after Saddam Hussein invaded Kuwait, sparking the Persian Gulf War, oil prices shot up but then subsided.

MUSTAFA ALANI: Our expectation that - similar scenario going to happen; that prices will jump because of the psychological reaction of the market, and the sensitivity of the market. But once the markets become assured that it is manageable crisis, the prices will go down.

KENYON: Still, in this economic climate, there are deep concerns that a war in the Persian Gulf could undo the effects of years of bailouts and austerity programs, and set the world economy back on its heels.

Peter Kenyon, NPR News, Istanbul.

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