The Iran war is becoming a global economic endurance test

THE widening of the Middle East conflict into Yemen and drone strikes on a critical Saudi oil pipeline highlight an uncomfortable reality: the Iran war is no longer a short-lived energy supply shock, but a prolonged, unpredictable test of global economic endurance.

With crude oil back above US$100 a barrel, markets are adjusting to a new and more volatile phase of the conflict, one in which many of the safeguards that cushioned the initial blow nearly seven months ago have disappeared.

United States President Donald Trump predicted last week that the conflict would end only after the US midterm elections on Nov 3. This is a notable shift in tone from an administration that initially suggested the war would last weeks, not months.

Whether this new forecast proves correct is impossible to know, but recent developments at two of the world's most important energy arteries suggest it may be very optimistic.

Yemen's Iran-aligned Houthis have made rapid advances over the past week, tightening their grip on the Bab el-Mandeb Strait at the southern entrance to the Red Sea. The group announced a naval blockade of the shipping route in July and has reiterated that transit remains safe for all vessels except those belonging to Saudi Arabia.

At the same time, Saudi Arabia's vital East-West oil pipeline, the kingdom's main alternative to the Strait of Hormuz, was temporarily shut after a series of drone attacks launched from Iraq, according to Saudi authorities.

The 1,200km pipeline has been critical for the kingdom since the Strait of Hormuz began to be disrupted following the outbreak of the war in February.

By more than doubling west coast exports via the pipeline, Saudi Arabia was able to offset a significant portion of the losses through Hormuz.

Yet those shipments fell to just two million barrels per day last month, the lowest since January, largely because of the Houthi blockade.

In turn, output from what was once the world's largest oil exporter fell to six million bpd last month, the lowest in more than three decades, according to the International Energy Agency (IEA).

Disruption to Middle East oil exports, which accounted for around a fifth of global supplies before the war, has sharply eroded global stocks.

It's true that more crude has been exiting Hormuz in recent months compared to the early months of the war, largely because more vessels have been using a route along Oman's coast under US Navy supervision.

Iranian strikes on over a dozen tankers attempting to cross Hormuz or inside the Gulf last week were a reminder that transits remain risky.

This status quo is unsustainable. The Middle East remains the most important energy-producing region in the world.

Halving crude exports from the Gulf may be manageable for a few months, but certainly not indefinitely.

Moreover, refined products like diesel, petrol and jet fuel have fared considerably worse than crude, with exports from the region remaining nearly 60 per cent below pre-war levels, according to IEA estimates.

This has led to acute fuel shortages, particularly of diesel, pushing prices to record levels. Further disruption to Saudi Arabia's Red Sea exports would put additional pressure on global inventories.

This latest flare-up could also cause ship traffic through Hormuz to shrink once again.

Tanker operators remain reluctant to enter conflict zones, freight and insurance costs have surged to all-time highs and naval escorts can only partially mitigate the risks of operating in a war zone.

The question now is how long these market dynamics can hold.

Iran's leadership views the conflict as existential and has every reason to maximise economic pressure on both the US and the wider global economy ahead of any eventual negotiations.

At the same time, Washington's increasingly stringent blockade of Iranian oil exports is inflicting severe damage on the Islamic republic's economy, raising the costs of extending the confrontation indefinitely.

Those competing pressures could bring both sides closer to the negotiating table. Equally, they could encourage each camp to keep fighting.

For nearly seven months, markets assumed Trump would find an off-ramp once rising petrol prices and political costs became too painful.

But that outcome depended on Teheran being willing to cooperate. So far, it has shown little interest in doing so.