What does war in Lebanon mean for Middle East business?

The return of war to the Lebanon was swift and unexpected this month. But it has become a new fact of life for millions of unfortunate Lebanese and casts a long shadow over the immediate business outlook for the whole Middle East.

Assessing the true likely impact of a war is impossible at this stage. But what can be done is to construct future scenarios. Let us take the two most obvious scenarios and try to extrapolate some commonsense views on the likely outcome.

First, let us assume that within a few weeks the fighting stops and the parties withdraw to their own borders and ceasefire as per the UN mandate. Then there will be damage assessment and a donor conference can be convened.

Back to normal?

Given the wealth and generosity of Lebanon's neighbors and a desire to restore the status quo ante, then a reconstruction and rebuilding boom can be anticipated. Life will get back to normal as far as possible as quickly as possible.

However, there is a second possibility. The conflict may not be containable and spill over into the rest of the region. Typically in the past the non-military response has been an interruption or scaling down of oil supplies to remind consumer nations that the Middle East has commercial if not military clout.

This is not the place to examine how, who or what might be involved in such a reaction. But it would draw the region into something far bigger in geopolitical impact than the dismantling of Lebanon.

For global and regional business the implications would be much more serious. The immediate oil price spike would create a sudden surge in regional liquidity but of an unstable and uncertain duration. In the past oil price spikes in the region have been the final stage before a recession, except in the 1970s.

Oil price spike?

Middle East business analysts will therefore greet such an oil spike with mixed feelings. Everybody knows that holding customers to ransom is not good business practice for the long term, as bankrupt customers can not buy goods in the future.

Indeed, the impact of an old fashioned oil crisis on the industrialized countries would be severe, and threaten to produce a major global financial crisis. If nothing else it could precipitate a thorough and sudden revaluation of all asset classes.

This kind of a shake up has followed oil crises in the past. In 1980 the Iranian Revolution precipitated the recession of the early 1980s and the First Gulf War led to the recession of the early 1990s. In both cases the Middle East saw an immediate increase in oil money followed by a price collapse and regional recession.

The 1973 war was the exception to the rule, and laid the ground for a higher general oil price level and a great investment boom. This is the optimistic view of the second scenario to today's events and business analysts should weigh their caution against this reality of oil as a great source of wealth in a world with limited resources.