JPMorgan's commodities analysts draw some frightening parallels between the current Israel - Iran tensions (discussed here) and the events leading up to World War I. They first point out that since the tensions have not escalated into a military conflict so far, in spite of numerous predictions, the public has lost "interest" and the markets moved on to other issues. The web search interest for the phrase "iran war" has dropped off significantly since the peak of early 2012.
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| Source: Google Insights for Search |
But that does not mean the risks have dissipated, particularly as Syria becomes a "wildcard".
JPM: In our view, the probability of a unilateral military strike by Israel against Iran has increased from low single digits (2% to 5%) in January 2012 to low double digits (10% to 15%) in August 2012. We think conventional wisdom vastly overestimated this risk in 1H2012, lost interest when missile volleys did not occur by June, and now underestimates the importance of recent threats by the Israeli leadership and the soul-searching public debate taking place within Israel about the wisdom of a preemptive strike.Israel's highly "optimistic" assessment of the costs of such a conflict (see this article) ignores history and raises the possibility of a major strategic error.
JPM: - It is a red flag when any state claims a military conflict it unilaterally starts will be contained to a short duration (30 days, say the Israelis) and limited homeland casualties (500 dead). This bluster ignores important lessons from history, such as are found in Barbara Tuchman’s masterpiece analysis of the causes of World War I, The Guns of August. We spotlight 10 lessons from that analysis and how they apply to commodity risk today.JPMorgan sees 10 parallels with the errors made during the period leading up to World War I (based on Barbara Tuchman’s The Guns of August.)
JPM:... the principal lessons as we see them are: (1) mobilization for war—“to send a message”—can create unexpected momentum that results in a massive war no one intended actually to start, (2) expectation for swift war can be a tragic miscalculation, (3) casualties and human carnage can be far higher than thought possible, (4) beware of fighting the last battle—military planning based on historical experience and stale assumptions leads to mistakes, (5) who strikes first matters—global public opinion may turn against the first striker, especially if that state tries to use subterfuge to implicate wrongly its opponent as the first striker, (6) the best laid plans are vulnerable to chaos, (7) unilateral actions can be perceived as reckless, forcing surprising shifts in formerly rock-solid alliances and forcing neutral sovereigns into active engagement, (8) significant economic integration is insufficient inoculation to prevent total war and prosecution of war can persist even if it means economic devastation, (9) appeals to national pride are insufficient to prevent political backlash to and moral condemnation of voluntary war, and (10) random events in proxy conflicts can be the catalyst for general war.The table below is an overview of these parallels as well as the actual outcomes of each of the decisions.
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| Source: JPM (click to enlarge) |
Based on the fact that such a conflict risks becoming far broader and deadlier than the early assessments, JMorgan's view is that oil prices would spike initially but would then decline below current levels as global demand comes to a halt.
JPM: - It is a nearly universally held belief that an Israeli attack must result in a large oil price spike, at least at first. Markets seem to be ill-prepared for the very real potential outcome that an attack could be followed by a strong downdraft in petroleum prices, like the one that followed Japan’s Tohoku earthquake last year, despite the loss of 1.2 mbd in Libyan crude output. If an attack occurred, we would not be surprised if the initial impulse were a smaller-than-expected and briefer-than-expected oil price spike followed by a stronger-than-expected oil price decline. ... [The decline would be driven by] large and unexpected damage to global commodity demand, while simultaneously boosting oil supply through release of strategic oil stocks.
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