Liam Dann: Rebel onslaught shakes global economy

Iraqi Shiite tribal fighters ready to defend Baghdad against the jihadi army of Sunni rebels who have swept through four Iraqi cities to the north. Photo / AP

Spike in oil prices from widened conflict could have far-reaching economic effects.

What sort of economic fallout can we expect if Baghdad falls?

Wow, what a question. It is a question that has carried serious geopolitical weight for thousands of years.

Here we are in 2014 asking it again.

In an astonishing turn of events a jihadi army of Sunni rebels has swept out of Syria and through four Iraqi cities shaking the stability of Iraq and the credibility of US foreign policy.

Isis, the Islamic State of Iraq and Syria, has claimed sovereignty for a new highly radicalised and militant nation.

If it succeeds in creating the caliphate it hopes to then, in the latest irony of modern history, the US will have played a key role in creating the kind of terrorist hotbed that George W. Bush and Donald Rumsfeld sought to avoid when they invaded Iraq 11 years ago.

With Shia religious leaders calling for holy war against the Sunni insurgents the prospect of a far wider sectarian conflict in the region is now a serious risk.

Will Baghdad fall? Probably not. It is a stronghold of Shia resistance and Iraq is now getting backup from religious allies Iran and, presumably at some point, its political ally America. But the situation is grim.

Clearly the most dreadful aspects of it all are humanitarian. The Isis rebels have been carrying out mass executions and have created a refugee crisis as hundreds of thousands of Iraqis flee the region.

In economic terms any kind of instability in the Middle East translates quickly to a spike in oil prices.

Markets hate uncertainty. As unpredictable events go, something that may see Iran and the US working together has to be right up there.

So far oil price rises have been relatively mild - the price of crude oil rose about 4 per cent last week as the events in Iraq unfolded.

The publicly listed companies most exposed to Iraqi instability have been subject to some panic selling.

But there are plenty of reasons why those exposed to oil costs should be even more concerned. Iraq is now the world's fourth largest oil exporter and seventh largest oil producer. It has been steadily ramping up production.

It currently produces about 3.3 million barrels a day but is expected to produce 4.4 million barrels a day by 2015 and nearly 6 million barrels a day by 2020. If the nation were to fall to civil war then that would cause a huge oil shock.

Some commentators are warning of the risk that Saudi Arabia, the world's largest oil exporter, could be drawn into the conflict.

Saudi Arabia is a Sunni nation which has prompted suggestions that it has some sympathies with Isis.

The prospect of the US being caught in the middle of a wider regional cold war between the Shia Iranians and its traditional Saudi ally is highly problematic.

From here it looks like a no-win scenario for President Obama.

Clearly there is much more at stake than the price of oil. But for the global economy the risk is always oil-related.

How much of an oil shock would it take right now to put the kibosh on the tepid recovery in the US?

That is another of the big unanswerable questions.

Has the US achieved a buffer of increased energy self-sufficiency? Last month Bloomberg reported that the US shale oil boom had lifted domestic production to a 28-year high.

The nation's stockpiles are high and that may delay the flow through of any oil shock. Still, any headwinds the US economy may face will have economic implications around the world.

In New Zealand we are benefiting from a historically high dollar which gives us the false sense that oil is still as cheap as it was a decade or so ago. In fact our dollar is almost twice as strong.

If dairy prices keep falling and our dollar follows as oil spikes then New Zealand business and consumers could suddenly face unexpected costs that might seriously dampen confidence.

For the sake of the people of the region more than anything else one can only hope for the best possible outcome from the current situation.

But quite what that might be is hard to fathom.

The brutal jihadi motivation of the Isis fighters suggests they won't back down even in the face of overwhelming odds.

Even if their momentum is halted and their influence contained an ongoing period of tension and conflict in the region looks inevitable.

It all looks very grim indeed.