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Middle East fallout could stretch to U.S.

Sat., July 15, 2006

Q: Israel and its neighbors are fighting again. Why should Americans care?

A: The most obvious reason is the economy. The latest fighting, which began when militants in Lebanon took two Israeli soldiers hostage on Wednesday, already has driven global oil prices to record highs, and they’re likely to go even higher. That could kick the U.S. economy, and the world’s, into a recession. That would mean that Americans would lose jobs, businesses would lose profits, and companies and their stockholders would lose money.

Q: Why are oil and gasoline prices going up? Israel and Lebanon don’t have oil.

A: People who buy oil in global markets are afraid the violence could spread to areas where the oil is. About a third of the world’s daily oil consumption comes from the Middle East, and about two-thirds of the world’s proven oil reserves are there.

Q: How might the violence spread to those areas?

A: The violence in Lebanon came after two weeks of Israeli military actions in the Gaza Strip, where Hamas-led militants also have abducted an Israeli soldier. Both the Shiite Muslim Hezbollah guerrillas in Lebanon and the militant Sunni Muslim organization Hamas receive money, weapons and other support from Syria and Iran. Both groups have offices in Damascus, the Syrian capital. In June, Israeli jets buzzed a house belonging to Syrian President Bashar Assad as part of its Gaza campaign and on Thursday bombed the Damascus-Beirut highway.

Q. Were Syria and Iran behind the rocket attacks and kidnappings?

A. Some Israeli and U.S. officials have implicated Syria and Iran in the violence, but U.S. intelligence officials say they have no hard evidence that Damascus or Tehran directed the attacks. Some U.S. and Israeli officials fear that Iran might be using militant groups in Iraq, Lebanon and the Palestinian territories to launch an offensive against Israel and the United States. Officials in Tehran deny that claim.

Q. What would happen if Israel attacked the Hezbollah office or other targets in Syria?

A. Iranian President Mahmoud Ahmadinejad said this week that his country would retaliate against any Israeli attack on Syria, though he didn’t say how. The sinking of a tanker in the Strait of Hormuz at the mouth of the Persian Gulf or an attack on other oil-related targets would send oil and gasoline prices still higher.

Q: But that hasn’t happened yet. Why are oil prices rising anyway?

A: Oil buyers are willing to pay more today to lock in contracts guaranteeing them delivery of oil at a date in the near future, so today’s high price reflects a fear premium.

Q: How might this lead to recession?

A: The U.S. economy is already slowing down. The latest job-growth numbers for June showed a slowdown in new job creation, retail sales are off, and the stock market is in a tailspin. Interest rates have been rising for two years and may continue to as the Federal Reserve tries to hold down inflation which itself is being pushed up by rising fuel prices. If the Fed raises interest rates too high, that could crush home sales, which could tip the economy into recession.

Q: How likely is all this?

A: No one can say for sure. Ed Yardeni, a veteran economic analyst with Oak Associates, reckons the probability of recession at only 20 percent, on the assumption that the Israeli military confines its offensive to Gaza and southern Lebanon. But that’s an assumption that hinges on decisions in Israel, Syria and Iran.


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