Direct impact: the war between Israel and Iran will raise prices in Brazil

The escalation of the conflict between Israel and Iran has increased the risks of a war of wider dimensions between a country with nuclear weapons (Israel) and another working to have its own (Iran).

The consequences of the geopolitical dispute, however, go beyond the military sphere: global markets will be affected by the conflict, which tends to generate a cascade effect on prices. And Brazil will not be immune.

Strait of Hormuz under threat

Iran is located at a strategic point in the Persian Gulf. The country controls the Strait of Hormuz, which is essential for regional trade, alongside the small principality of Oman.

This is where products imported by Saudi Arabia enter, a regime that, although it is also an Islamic theocracy with Iran, has a history of friction with the Iranian ayatollahs and maintains a considerably friendly relationship with the United States.

A large volume of Brazilian exports also passes through the Strait of Hormuz: Brazilian meat producers have an important market in the region — especially in Saudi Arabia and the United Arab Emirates.

But Hormuz's importance to the global economy has to do above all with fossil fuels. About a quarter of the world's oil trade passes through Hormuz. This includes oil from Iran itself, but also from four other major exporters: Saudi Arabia, the United Arab Emirates, Kuwait and Iraq.

As Israel began its series of attacks on targets of the Iranian theocracy, the Iranian news agency IRA Novosti stated that the government of the ayatollahs is considering closing the strait. Although this has not yet happened, the lack of security has already led one of the largest oil tanker companies on the planet, Frontline, to announce this Saturday (14) that it will avoid the Strait of Hormuz route because of the conflict.

Oil exports at risk

Even if the Strait of Hormuz is not blocked, the dispute between Israel and Iran is likely to affect the price of oil.

Crude oil prices rose 7.26% on Friday alone (13). Compared to June 10, when rumors of a possible Israeli attack on Iran began to spread, the accumulated increase reached 12.3%. On Monday, as markets reopen, the upward trajectory is set to continue.

As of Saturday night, Israel has attacked at least four strategic points for Iran's economy: the refinery in the Shahran oil field, the refinery in the South Pars field, another natural gas refinery in Fajr Jam and a port in the Persian Gulf — Kangan LNG.

Due to sanctions imposed by the United States and other Western countries, Iran sells most of its oil to China. In other words, the break in the Iranian oil export chain does not initially affect the West. However, since oil is a commodity, the law of supply and demand applies: with lower supply (and relatively stable demand), the price tends to rise. Without buying from Iran, China will have to look for alternative sources and compete for markets with other nations.

Iran has the fourth largest oil reserves in the world — behind Venezuela, Saudi Arabia and Canada, and ahead of Iraq, Kuwait, the United Arab Emirates, Russia and Libya.

The increase in the price of oil tends to be immediately reflected in Brazilian gas stations, but it should also affect the price of imported items and those that, although manufactured in Brazil, depend on parts from abroad.

Furthermore, most of the products on supermarket shelves depend on road transport. “Our transport matrix is ​​mostly road transport. As a result, we have seen an increase in the price of freight and goods that reach the end consumer,” explains Renan Silva, professor of Economics at Ibmec Brasília. Today, around 65% of cargo transport in Brazil is done by trucks.

A secondary consequence of this problem could be the maintenance of high interest rates as a remedy against inflation. “We are already working with an index above the inflation target. This is worrying and could cause our interest rates, which are already very high, to remain so for an even longer period,” says the professor.

Instability favors the dollar

More broadly, a major conflict between Israel and Iran will also increase international market volatility. With fears that the war could expand and involve other major players — such as the United States — the medium- and long-term outlook becomes more nebulous.

In times of instability, the market tends to seek safe assets, such as the dollar. This tends to generate an appreciation of the US currency. In practical terms, when this happens, the real becomes weaker and the price of commodities and their derivatives tends to rise in Brazil.

“The dollar, despite all the questions, is the currency that still has the greatest credibility in the global economy,” says Professor Renan Silva. He says that Russia’s invasion of Ukraine had a similar effect — in addition to the dollar, it also increased the demand for gold.

The professor points out that it is still too early to assess all the economic and geopolitical consequences of the war between Israel and Iran. “In any case, the dollar has already gained value against other currencies and this also generates inflationary pressure here in Brazil, because we are very dependent on imported production inputs,” he says.