Alexander Redman, Chief Equity Strategist at CLSA, describes the escalating Middle East conflict—termed “Gulf War 3″—as a geopolitical “mighty mess” with few clear victors. While Benjamin Netanyahu emerges as a “real winner” by claiming the destruction of regional adversaries ahead of his October re-election, the United States finds itself caught in a precarious position. Redman highlights that Donald Trump is now pursuing an exit strategy to avoid further domestic fallout.
The most significant threat to the U.S. administration is the surge in oil prices, which recently spiked to $120 per barrel. Redman explains that because the U.S. has minimal gasoline taxation, there is a direct correlation between WTI prices and the cost at the pump. With prices nearing $4.70 to $5.00 per gallon, the strategist labels the situation “political suicide” for the Republican Party leading into the midterms, particularly as employment data begins to weaken.
Strategically, the war has not achieved the goal of regime change in Iran; instead, power has transitioned to the late leader’s son. Furthermore, the conflict has devolved into an expensive “numbers game.” Redman notes that even a ceasefire today would not provide immediate relief, as destroyed infrastructure in Iran and Kuwait means oil prices will likely stay “higher for longer”.
The economic impact on the Asia-Pacific region is severe. With 24% of global oil consumption transiting the Straits of Hormuz, net importers like the Philippines, India, and Indonesia face a “double whammy” of rising import costs and widening current account deficits. Thailand and Indonesia are especially vulnerable due to the high weighting of energy in their CPI baskets.
