Kevin Kelly is in a tough spot. What he says are unprecedented price increases in the weeks since the US waged war on Iran mean the Californian, who makes plastic bags for groceries, may have to break contracts he cannot afford to honour with his customers.
Thousands of miles away in India, gas shortages have closed dozens of plants that export aluminium products around the world. And in Britain, some farmers are eking out their fertiliser stocks as prices soar.
With the war in its sixth week and almost a fifth of the world’s oil supplies affected by Iran’s limits on shipping through the Strait of Hormuz, consequences are spreading from financial markets into business activity, raising risks of a global economic pullback – or even recession.
Kelly said sharp jumps in the cost of plastic resin over a couple of weeks from 45 cents to 85 cents per pound meant it would be economic suicide for Emerald Packaging, his $92 million a year family-owned business, to keep the prices agreed in pending orders.
“We’ll just declare force majeure,” he said during an interview at his Union City factory near San Francisco.
When a company declares force majeure, it is telling customers it cannot deliver on contracts due to factors beyond the company’s control.
“The increases are so high, if we were to lose a customer because we pass them through, we just have to let them go,” he said, adding that he expected most of his long-standing clients would understand and swallow the changed terms.
Countries in Asia and Europe are more exposed to the fallout of the Gulf energy shock than the US. However, analysts say pullback among American consumers is inevitable as inflationary pressures rise. In a sign that the problems faced by Emerald Packaging are more widespread, prices paid by businesses for inputs increased by the most in more than 13 years in March. Goldman Sachs has raised its view on the risk of a US recession to as much 30 per cent.
US President Donald Trump has kept investors on edge by talking up negotiations with Iran while threatening to destroy its civilisation and send it back to the ‘stone age’ with intensified attacks, including on its bridges and power plants. He warned Iran could be “taken out” if it did not meet a Tuesday night deadline to reach a deal.
Risks sharpen for the global economy if oil moves above $110 or $120 a barrel, warned Nathan Sheets, chief global economist at Citi and a former US Treasury Department official.
“As this shock gets bigger and bigger, the risks of recession are rising significantly...There are likely some thresholds where...certain kinds of economic activity no longer are justifiable, and you have a sharper, more nonlinear pullback,” Sheets said.
The war, if it persists or escalates, is likely to test the trigger price at which the world’s demand for petroleum is wrenched into line with its suddenly constrained supply. That means a contraction in economic activity.
If the current disruption to supply is sustained, 13 analysts polled by Reuters forecast an oil price of between $100-$190 per barrel for the year.
Even if the conflict is swiftly resolved, the International Monetary Fund is set to reduce its forecast for global economic growth and bump up its outlook for inflation, IMF managing director Kristalina Georgieva said on Monday.
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