Afrasianet - Tariq Al Shal - Rising gasoline prices in the United States, following renewed escalation between the United States and Iran, has revived the debate over the limits of the U.S. economy's ability to afford a military escalation. With every spike in oil prices or disruption to navigation, the question of whether economic pressures may become a factor in the calculations of President Donald Trump's administration is renewed.
Data from the American Automobile Association (AAA) showed that the average price of a gallon of regular gasoline rose to $3.88 from $3.79, and the average price of a gallon of diesel rose to $4.81 compared to $4.77, while California remained the highest average price at about $5.38 per gallon.
This increase does not seem significant on the face of it, but it comes shortly after the decline in prices following the temporary ceasefire agreement, reflecting the speed with which geopolitical tensions are spreading to the US energy market, which makes fuel prices one of the most sensitive indicators for the US administration, especially with the midterm elections approaching.
The pressure is not limited to rising energy prices, as developments in recent weeks reveal that the White House has begun to step in to pressure companies to lower prices.
Trump has called on gas stations to target a price of about $2.50 a gallon, threatening them with "big problems" if they don't cut prices, and announced that Walmart has slashed prices of thousands of goods at the request of his administration, at a time when U.S. inflation rose to 4.2% in May, the highest level in three years, according to the Financial Times.
Why didn't Trump strike at the start of the weekend?
Economic analyst Mohamed Mamdouh al-Nowaila believes that the pattern followed by the administration over the past months reveals the use of the military threat as a negotiating pressure tool, while leaving time for regional mediators to try to contain the escalation.
Speaking to Al Jazeera Net, Al-Nuwaila pointed out that the implementation of the strikes over the weekend gives markets time to absorb developments before the opening of global trading sessions, which may limit immediate reactions compared to their implementation while the markets are working.
Economist Mustafa Youssef links the delay of the strike to the administration's reading of market behavior, explaining that investors have come to view limited strikes as short-term events that do not necessarily lead to an all-out war, which reduces their direct impact on the markets compared to the early stages of the crisis.
Youssef added during his interview with Al Jazeera Net, that the administration was aware that any large-scale escalation could quickly be reflected in oil and gasoline prices, which makes the timing of military operations part of managing the economic cost of the conflict, and not just managing the military battle.
At what level does real political pressure begin?
Gasoline prices are the most sensitive indicator in this context, as they represent the cost that the American consumer touches on a daily basis, unlike oil prices, which remain an indicator that investors and specialists follow more than the general electorate.
According to the Financial Times, the average price of US gasoline approaching $4 per gallon marks the beginning of what investors describe as a "pain point," as rising fuels begin to shift from volatility in energy markets to a livelihood and election issue that consumers feel daily at gas stations.
Jorge Montebeque, an oil analyst at Onyx Capital Group, said that exceeding the $4 per gallon level of gasoline could become a "political killer", given the sensitivity of the US voter to fuel prices and their direct correlation to transportation, food and travel costs.
This does not mean that gasoline reaching $4 will automatically lead to a halt to the escalation, but it marks the beginning of the rise in the cost of the war internally, especially if the price stabilizes above this level, rather than surpassing it for a short time.
This estimate is based on the recent history of the US fuel market, where exceeding this level in previous crises has been linked to increasing pressure on US administrations to take action to lower prices, whether by withdrawing from oil reserves, putting pressure on energy companies, or accelerating diplomatic processes.
On the other hand, Mustafa Youssef believes that the most important factor is not only the price of gasoline, but the stability of oil prices above $100 per barrel, because the fact that crude remains at this level for a long time makes it difficult for gasoline to return below $4, and increases inflationary pressures on the US economy.
He points out that oil prices have risen in recent days from about $69 to about $79 per barrel, a rise that still represents limited pressure, but could turn into greater political pressure if oil crosses the $100 barrier and stabilizes above it.
Mustafa points out that markets are also watching US Treasury yields , stock performance, and inflation expectations, especially since the combination of these indicators in one direction increases the cost of continuing the war on the US economy.
Is the White House afraid of Wall Street's reaction?
Economist Mustafa Youssef believes that Trump is more sensitive to the reaction of Wall Street and the American voter, especially as the midterm elections approach, noting that the Iranian response, if it remains limited, may have less political impact than the continued rise in gasoline or the fall of markets.
Even if it responds, he says, Iran will try to avoid strikes that lead to significant U.S. losses, while the impact of rising prices and falling stocks remains felt daily by millions of Americans.
On the other hand, economic analyst Mohamed Mamdouh al-Nuwaila points out that the administration does not pit the markets against military considerations, but rather tries to manage the two tracks together.
Washington is believed to have continued to carry out military strikes despite the decline in stocks, but at the same time took steps to limit the impact of the crisis to the economy, whether by monitoring energy markets or following developments in shipping and insurance.
The Federal Reserve's research suggests a clear correlation between stock market wealth and consumer spending, with traditional economic models estimating that a $1 increase in market wealth raises annual spending by about 3 to 7 cents. When prices crash, the effect is the opposite effect, as asset owners feel less wealthy, cutting back on spending or postponing large purchases.
What happens if markets collapse?
Since returning to the White House, Trump has made the record performance of stock indices one of the most prominent pieces of evidence on which to defend his economic policies, and has repeatedly linked the rise of the market to the strength of the U.S. economy and the improvement of savings and retirement accounts, making any broad collapse in stocks weaken one of the administration's most important messages to address voters.
Al-Nawaila points out that this scenario could push the US economy towards a state of stagflation , where growth slows while prices remain high, which is one of the most complex scenarios for monetary policymakers.
He pointed out that the decline of markets is not only reflected on investors, but also affects the decisions of companies. Large waves of selling usually lead to the postponement of investments, the freezing of employment, and the reduction of capital expenditure, which is gradually reflected in economic growth and the labor market.
On the other hand, Nawaila believes that this scenario puts the Fed in a more difficult equation. If the fall in stocks is the result of higher oil prices and inflation, lowering interest rates to support the economy could increase inflationary pressures, while maintaining high interest rates would increase pressure on markets and businesses.
For his part, Mustafa Youssef explained that the continuation of this situation for several months may force the US administration to reevaluate its policies, especially if it coincides with the rise in gasoline and the decline in consumer confidence, because the American voter is directly affected by the rising cost of living, rather than by distant military developments.
He adds that any sharp decline on Wall Street could reflect on the Republicans' chances in the midterm elections, which makes the administration more inclined to look for ways to contain the escalation, whether by returning to the diplomatic track or taking economic measures to ease pressure on markets.
The challenge for the administration is not just the performance of financial markets, as polls show that living pressures are beginning to be reflected in the electoral mood. A Financial Times poll showed that 67% of voters disapprove of Trump's handling of the cost of living, while 58% said the war with Iran was not worth its economic cost.
How will shipping traffic and insurance costs be affected?
Shipping is the fastest link in transferring the effects of any military escalation in the Gulf to the global economy, as the repercussions of tension are not limited to oil prices, but also extend to the cost of transporting and securing it, and then to the prices of goods and supply chains.
Recent developments show that maritime markets have responded to the escalation at a faster pace than oil markets themselves. After attacks on three commercial vessels this week, premiums for war risk insurance to cross the Strait of Hormuz have soared, while requests for insurance coverage have fallen, a sign of shipowners' growing reluctance to cross the waterway, according to brokers and experts in the London marine insurance market.
According to the agency, insurance premiums currently range between 2% and 6% of the value of the ship, compared to a fraction of 1% before the outbreak of the conflict last February. During the height of the clashes, premiums reached about 10% of the ship's value, before dropping to less than 2% following the announcement of a temporary truce between Washington and Tehran, only to rise again as tensions rebounded.
That means the cost of insuring a $100 million oil tanker could be as high as $6 million per trip at current prices, estimates Marcus Baker, global head of marine insurance at Marsh, though some companies are getting discounts that reduce the actual cost.
The image also corroborates statements by Neil Roberts, head of marine and air insurance at the Lloyd's Market Association, who told Xinhua that the cost of insurance "changes depending on the risk", explaining that it fell after the signing of the memorandum of understanding between the US and Iran in June, before rising again following the targeting of commercial vessels this week.
The impact of the escalation is not limited to the Strait of Hormuz, as the pressure has extended to the Red Sea, where war risk insurance premiums have risen to about 1% of the ship's value, compared to about 0.4% before the resumption of attacks on commercial ships, according to the Financial Times.
This reflects that shipping companies are not only facing an increase in the cost of insurance, but also an operational dilemma of choosing between transiting high-risk areas or resorting to longer, more expensive sea routes.
Economist Mustafa Youssef believes that the continuation of these conditions will push an increasing number of ships to change their routes, especially through the Cape of Good Hope, which means an increase in flight time, fuel consumption and operating fees, and thus an increase in the cost of transporting goods even if oil prices are stable.
He adds that this increase does not stop at transport companies, but gradually moves to all sectors of the economy, starting with importers, then factories, then wholesalers and retailers, and ending with the final consumer, which increases inflationary pressures at a time when the global economy is already suffering from slowing growth.
For his part, economic analyst Mohamed Mamdouh al-Nawaila points out that the risk lies not only in the rise in prices, but also in their continuation after the crisis is over. In his estimation, insurance companies do not repprice risks immediately after a truce or political agreement is announced, but rather wait for a longer period to ensure that the situation is stable, which means that transportation and insurance costs may remain high even after military operations stop.
He adds that this phenomenon makes the impact of geopolitical crises longer than military events themselves, because restoring confidence in sea lanes takes longer than restoring political calm.
The repercussions are not limited to the transport sector, as they extend to the energy markets, commodities and global supply chains, as any increase in the cost of shipping or insurance is reflected in the cost of transporting oil and gas, raw materials and industrial goods, raising production and consumption prices and increasing pressures on inflation rates globally.
Source: Al Jazeera
