Oil prices reportedly dropped sharply by around 11 percent on Monday, March 23, in the wake of reported statement of US President Donald J. Trump on social media platform ‘Truth Social’ indicating ‘very good and productive conversations’ between US and Iran, and that he had ‘instructed the Department of War to postpone any and all military strikes against Iranian power plants and energy infrastructure for a five day period, subject to the success of the ongoing meetings and discussions.’ However, his claim was reportedly dismissed by Iran, as The Guardian pointed out, ‘Iranian parliament speaker says “no negotiations” held with US.’

This fledgling sense of optimism apparently had a slight positive impact on global stocks, whereby New York Times (NYT) indicated on March 24, ‘Stocks in Europe were mixed on Tuesday after a bounce on Monday. The DAX in Germany, the FTSE 100 in Britain and the Stoxx 600, a broad European index, all rose about half a percent before pulling back, erasing those gains.Stocks in Asia, where countries import vast quantities of oil and gas, were higher on Tuesday. The Nikkei 225 in Japan rose 1.4 percent, while other benchmarks in South Korea and Hong Kong gained more than 2 percent. Futures on the S&P 500 pointed to a lower open when stocks resume trading in the United States on Tuesday. On Monday, the S&P 500 gained 1.15 percent, the index’s best day since the war began.’

Moreover, another factor that could build optimism is the reported role being played by Pakistan to mediate for an end to conflict, whereby as per a March 24, Bloomberg published article ‘Pakistan seeks to mediate talks with US, Iran in Islamabad’ pointed out, ‘Pakistan is making a push to mediate talks to end the US-Israeli war against Iran… It’s possible that Trump’s special envoys Steve Witkoff and Jared Kushner, and US Vice President JD Vance, could travel to Islamabad if an agreement was likely to be reached, said one senior Western diplomat.’

In addition, reportedly, US formulated a ‘15-Point Plan’ as a possible basis for negotiations, which as per media reports was circulated through Pakistan. Bloomberg in a March 24 published article ‘United States said to have sent Iran a Plan to end the Middle East War’ highlighted that it was NYT, which first reported about this plan. Moreover, the article indicated in this regard, ‘The United States has sent Iran a 15-point plan to end the war in the Middle East, according to two officials briefed on the diplomacy, reflecting the Trump administration’s eagerness to find an offramp from the conflict as it grapples with its economic fallout. It was unclear how widely the plan, delivered by way of Pakistan, had been shared among Iranian officials and whether Iran was likely to accept it as a basis for negotiations. Nor was it clear whether Israel, which has been bombing Iran together with the United States, was on board with the proposal. But the delivery of the plan showed that the administration was ramping up efforts to conclude a war, now in its fourth week, that has drawn in several other countries. The New York Times did not see a copy of the plan, but the officials, who spoke on condition of anonymity to discuss sensitive details, shared some of its broad outlines, saying that it addresses Iran’s ballistic missile and nuclear programs.’

Furthermore, a March 24, The Guardian published article ‘Trump’s rehashed 15-point Iran plan unlikely to appease Tehran’ pointed out in this regard that ‘Iran, in any new talks probably overseen by Pakistan and held in Islamabad, would likely seek that the discussions focus on some kind of hard to deliver undertaking that the US will not mount further military attacks on Iran. The issue of freedom of navigation along the Strait of Hormuz would also have to be addressed by Iran. The Gulf states will also be looking for some kind of guarantees from Iran through a non-aggression pact.’ Moreover, on March 25, Bloomberg indicated ‘Iran received a 15-point proposal drafted by the US, according to AP [Associated Press]. The proposal covers sanctions relief, civilian nuclear cooperation, a rollback of Iran’s nuclear program, missile limits and access for shipping through the Strait of Hormuz.’

Reports of possible negotiations have brought some ease to the oil market as Bloomberg pointed out in a March 25 published article, ‘Oil declines as US ramps up diplomatic push to end war with Iran’ that ‘Oil fell as a diplomatic push by the US to try to end the war with Iran gathered pace, eclipsing news of more troops being sent to the region and the Strait of Hormuz remaining largely shut. Brent sank as much as 7 percent toward USD 97 a barrel before paring the drop, while West Texas Intermediate was near USD 89.’

Having said that, most probably at the back of lack of any meaningful positive built-up in momentum of negotiations, oil prices have increased sharply, as a Bloomberg published article ‘Oil advances as US and Iran offer conflicting comments on talks’ on March 26 pointed out, ‘Oil climbed as the US and Iran offered conflicting comments on efforts to end the war that’s shuttered the Strait of Hormuz, choked off swathes of crude production, and stoked concerns of a global energy crisis. With attacks continuing in countries across the region, Brent advanced toward USD 105 a barrel after declining by more than 2% on Wednesday…’

Moreover, another article ‘BlackRock’s Kapito Warns Investors Are Mispricing Iran Risks’ published by Bloomberg on March 26, highlighted deeper negative consequences of the Middle East conflict as per ‘BlackRock’ as ‘BlackRock Inc. President Rob Kapito said investors may be underestimating the risks stemming from the Iran war, which are likely to weigh on growth and drive inflation higher even if the conflict ends soon. Growth could be hit by as much as two percentage points, while inflation may rise by a similar margin even if the war ends shortly, warned Kapito at the Asia Pacific Financial and Innovation Symposium in Melbourne on Thursday. Oil may still spike to USD 150 a barrel even “if we announce tomorrow the war is over,” as it would take time for disrupted supply chains to return to full capacity.’

Yet, for the time being the Middle East continues to embroil in conflict, serving, in turn, as strong headwinds to an otherwise very fragile sense of optimism to start with. Bloomberg on March 24 indicated ‘…fighting has continued despite Trump saying talks to end the conflict are underway. Iran launched overnight missile and drone attacks on the Israeli cities of Eilat, Dimona and Tel Aviv, as well as US bases in the Middle East. Saudi Arabia said it intercepted a drone in its eastern region, and Kuwait said some power lines were put out of service after an Iranian attack. Sirens sounded in Bahrain. In Iran, the Fars news agency reported US-Israeli attacks that damaged a gas pressure-regulation plant and an administrative building in the central city of Isfahan. There was also a strike on a pipeline supplying gas to the Khorramshahr Combined Cycle Power Plant in southwestern Iran, according to Fars.’

Moreover, while there is reportedly a move towards holding negotiations with Iran, The Guardian for instance pointed out in a March 25 published article ‘US set to send airborne troops to Middle East as Trump claims talks with Iran taking place’ that ‘The US is poised to deploy airborne troops to the Middle East as strikes intensified across the region on Tuesday and Donald Trump claimed the US was in “very good” talks with Iran to end the war. Early on Wednesday, Iran’s Revolutionary Guards said it had launched a new wave of attacks against locations in Israel including Tel Aviv and Kiryat Shmona, as well as US bases in Kuwait, Jordan and Bahrain. …An Iranian military spokesperson mocked the 15-point framework plan for peace that Trump has claimed is being discussed, saying on Wednesday that the Americans were negotiating only with themselves.’ Furthermore, on March 26, NYT indicated that ‘The Iranian official said that Tehran would not allow Trump “to dictate the timing of the war’s end.”’ The conflict is apparently far from moving towards any simpler situation for global politics, and economics, and that indeed puts any optimism for the world economy moving towards some semblance of normality on thin ice for the moment.

More broadly, there are already build-ups of strong stagflationary headwinds in the global economy, as pointed out for instance in a March 25, Bloomberg published article ‘War knocks global economy with dual shock to growth, prices’ as follows: ‘The world economy’s first signs of a synchronized shock emerged in business surveys revealing how the Iran war’s fallout is crippling growth momentum and stoking prices. Multiple purchasing manager indexes compiled by S&P Global for March showed declines. Among the releases on Tuesday, composite measures for the US and the euro zone were lower than economists predicted. Australia’s equivalent gauge slumped to indicate a sudden contraction, and Indian factory activity slowed to the weakest since 2021.Several price readings surged meanwhile, with input cost inflation in Germany, Europe’s biggest economy, quickening to the fastest pace in more than three years. A similar gauge for UK manufacturing jumped the most since 1992. …“Before the Iran war erupted, our global growth tracker suggested the world economy was gathering momentum,” said Jamie Rush, director of global economics at Bloomberg Economics. “The PMI figures emerging from advanced economies suggest that nascent recovery is in danger of being choked off by a combination of higher oil costs, tighter financial conditions and faltering sentiment.” …“The flash euro-zone PMI is ringing stagflation alarm bells as the war in the Middle East drives prices sharply higher while stifling growth,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in accompanying commentary.’

Highlighting deeper structural impact on the global economy by the Middle East conflict, noted economist Mohamed A. El-Erian pointed out in a ‘Substack’ published article ‘The weekly look at the global economy and markets’ as ‘The third week of the conflict was defined by a significant escalation in attacks on energy infrastructure. This has shifted the economic narrative from short-term disruption to long-term structural damage. A stark illustration was Qatar’s announcement that 17% of its LNG capacity has been sidelined – impacting 12.8 million tons of annual output for three to five years. This followed the Israeli attack on the South Pars field in Iran.’

With the deep level of damage already caused to energy facilities in the Middle East region, even if an agreement reached today, impact of aggregate supply shock already caused, especially in terms of damage to oil, and gas production facilities, will likely lead to continuation of elevated levels of prices for oil, gas, and fertilizers over the coming months.

That means likely tightening response from monetary policy as the conflict goes deeper, although for now the stance has been cautious in terms of statements, except that by central bank in Australia. The same article pointed out in this regard: ‘While the four systemically important central banks (BoE [Bank of England], BoJ [Bank of Japan], ECB [European Central Bank], and Fed [US Federal Reserve]) all held rates steady, the Reserve Bank of Australia (RBA) broke ranks with a 25-basis-point hike. This likely serves as a leading indicator for single-mandate peers such as the BoE and the ECB ahead of their upcoming meetings.’

Moreover, a Bloomberg published article ‘ECB won’t be “paralyzed by hesitation” on Iran, Lagarde says’ on March 25 indicated the following: ‘The European Central Bank will act decisively and swiftly if the current surge in energy costs risks a broader bout of inflation, though for now it’s still assessing the shock caused by the Iran war, according to President Christine Lagarde. …“We will not act before we have sufficient information on the size and persistence of the shock and its propagation,” she told the ECB Watchers Conference in Frankfurt. “But we will not be paralyzed by hesitation: our commitment to delivering 2% inflation over the medium term is unconditional.”’

Having said that, the extent of tightening should be learnt from the misgivings of an over-board monetary in the wake of Covid-19 pandemic, and the Ukraine War, that led to an unnecessarily high level of curtailment of economic growth, calling in turn for adoption of a more balanced policy approach in terms of adopting aggregate demand squeezing, and supply boosting policies. Moreover, policy – including that by International Monetary Fund (IMF) – will need to be mindful of the fact that creating resilience against climate change, and conflict related shocks requires an adequate level of investment, and high borrowing costs will likely significantly hinder needed effort; not to mention the negative impact of such over-board monetary, and fiscal austerity policies perpetuating stagflationary, and high debt distress consequences.

Moreover, the current conflict, especially due to the virtual closure of the Strait of Hormuz has negatively impacted food supply, and significantly elevated food prices. The World Food programme (WFP) has already raised alarm with regard to significant consequence on food prices, and on global hunger situation. In a March 17 published news release ‘WFP projects food insecurity could reach record levels as a result of Middle East escalation’ pointed out in this regard: ‘New analysis by WFP estimates that almost 45 million more people could fall into acute food insecurity or worse… if the conflict does not end by the middle of the year, and if oil prices remain above USD 100 a barrel. These would add to the 318 million people around the world who are already food insecure. …The virtual shipping standstill in the Strait of Hormuz and mounting risks to Red Sea maritime traffic are already increasing energy, fuel, and fertilizer costs, deepening hunger beyond the Middle East. …According to WFP’s analysis, countries in sub-Saharan Africa and Asia are the most vulnerable due to a reliance on food and fuel imports. Projections indicate an increase of 21 percent in food-insecure people for West and Central Africa and 17 percent for East and Southern Africa. An increase of 24 percent is forecast for Asia.’

It needs to be mentioned here that in the case of Pakistan, while efforts on the diplomatic front are indeed something to be appreciated, it is strange to say the least that given the crisis situation regarding fuel, and fertilizer shortages, and highly elevated energy prices, there is neither any reported talk of putting in place a ‘national energy emergency’ on the lines for example as being reportedly adopted by the Philippines, nor is there any emergency-natured, mission-oriented policy announcement for supporting farmers against these shocks.