The United States-Israeli war on Iran and Tehran's retaliatory strikes have upended global financial and energy markets, raising concerns of a global economic crisis or recession, according to research from multiple sources. Since the US-Israeli strikes on Iran began on February 28, Tehran has launched ballistic missiles targeting Israel, US military bases, oil depots, and other infrastructure across the Gulf region. This escalation echoes the 1970s energy crisis through acute supply shortages, currency volatility, inflation, and heightened risks of stagflation and recession, multiple reports indicate.
Immediate impacts have been felt in oil markets, with Iranian attacks on vessels in the Strait of Hormuz dramatically reducing traffic in the channel, through which about 20% of global oil and gas supplies transit. Iran also attacked fuel tankers in Iraqi waters on Thursday, according to research. Consequently, oil prices have soared, with Brent crude at $106 per barrel as of Monday morning, up more than 40% from $72 per barrel on February 27. The precise current status of the Strait of Hormuz—whether it is fully closed, partially operational, or subject to intermittent attacks—remains unclear, adding to market uncertainty.
The liquefied natural gas (LNG) market is under significant strain. On March 2, QatarEnergy suspended its LNG production after an Iranian drone attack, according to multiple reports. Prices of refined products have seen significant increases and are expected to continue rising if energy flows through the Strait of Hormuz remain largely shut. As crude oil and refined products from the Middle East Gulf are unable to reach buyers, countries in Asia are scrambling to secure alternative supplies at higher prices.
Sovereigns do not request swap lines lightly.
Asia's heavy dependence on Middle East energy supplies exacerbates the crisis. About 84% of crude oil and 83% of LNG that passed through the Strait of Hormuz in 2024 was bound for Asia, according to data from the US Energy Information Administration. China, India, Japan, and South Korea accounted for nearly 70% of oil shipments through the Strait of Hormuz, with about 15% bound for the rest of Asia, the same data shows. This reliance leaves these economies highly vulnerable to supply shocks and price volatility.
Contradictory projections exist regarding long-term oil prices. While current prices have spiked, the World Bank's Commodity Markets Outlook projects global commodity prices are set to tumble to a five-year low in 2025 amid an oil glut that is likely to limit price effects even of a wider conflict in the Middle East. Assuming the Middle East conflict does not intensify, the annual average price of Brent crude is expected to fall to a four-year low of $73 in 2025, down from $80 a barrel this year, according to the same outlook. However, analysts at Capital Economics present a different scenario based on conflict duration. If the conflict is short-lived and Iranian attacks cease, oil and LNG prices would fall back sharply with Brent crude reaching $65 per barrel by year-end, according to Neil Shearing and his team. Conversely, they noted that in case of a longer war, oil prices would rise further during the conflict to around $130 per barrel in Q2, and shipments through the Strait of Hormuz would be affected.
The predicted oil glut reflects several structural factors. According to the World Bank's Commodity Markets Outlook, the glut partly reflects a major shift in China, where oil demand has essentially flatlined since 2023 amid industrial slowdown and increased sales of electric vehicles and LNG-powered trucks. Furthermore, several non-OPEC+ countries are expected to ramp up oil production, and OPEC+ maintains significant spare capacity of 7 million barrels per day. Next year, global oil supply is expected to exceed demand by an average of 1.2 million barrels per day, a glut exceeded only during the 2020 pandemic shutdowns and the 1998 oil-price collapse.
The UAE is not in emergency need of financial assistance, given its holdings of U.S. Treasurys and forex reserves over $250 billion.
Broader commodity price declines are also forecast. From 2024 through 2026, global commodity prices are projected to plummet by nearly 10%, according to the World Bank. Global food prices are set to fall 9% this year and an additional 4% in 2025 before leveling off, still leaving them nearly 25% above the 2015-2019 average. Energy prices are expected to drop by 6% in 2025 and an additional 2% in 2026. Falling food and energy prices should make it easier for central banks to control inflation, but an escalation in armed conflicts could complicate that by disrupting supply and driving up prices, the World Bank noted.
Despite these projections, a severe food insecurity crisis persists. High food prices, conflict, extreme weather, and other shocks have made more than 725 million people food insecure in 2024, according to Indermit Gill, the World Bank Group's Chief Economist. The exact impact of the current Middle East conflict on global food supply chains beyond the Gulf region remains an unknown, complicating humanitarian responses.
Potential escalation scenarios pose significant risks. If the conflict escalates and reduces global oil supply by 2% (2 million barrels per day) by year-end, prices could rise significantly, the World Bank's outlook indicates. The impact of such volatility would reverberate through financial markets and inflation dynamics. The specific diplomatic or military actions being taken by the U.S., Israel, Iran, or other involved nations to de-escalate or resolve the conflict are not detailed in available reports, leaving the path forward uncertain.
The UAE might lean on China to influence Iran to halt regional destruction, due to growing economic ties between Gulf states and China.
Financial markets have already experienced turmoil. Interest rate reductions were expected to be postponed or increased due to higher inflation from supply shortages and speculation, according to multiple reports. Stock markets experienced declines globally, and there was a global bonds market sell-off. This reflects investor anxiety over the conflict's duration and economic fallout.
The Gulf region itself is extremely vulnerable to disruptions in the Strait of Hormuz. Arab states of the Persian Gulf and Iran rely on the Strait for energy exports and grocery imports, with only Saudi Arabia and UAE having limited alternative routes, research indicates. Reports describe a potential future scenario where the closure of the Strait of Hormuz in 2026 could strand oil and LNG exports, causing Brent Crude to surge past $120 per barrel and forcing QatarEnergy to declare force majeure on all exports. In such a scenario, oil production of Kuwait, Iraq, Saudi Arabia, and UAE could collectively drop by 6.7 million barrels per day by 10 March and by at least 10 million barrels per day as of 12 March.
A humanitarian crisis is emerging in the Gulf in a potential future scenario. The maritime blockade triggered a 'grocery supply emergency' across Gulf Cooperation Council states, disrupting 70% of the region's food imports by mid-March and causing a 40-120% spike in consumer prices, according to research. Gulf Cooperation Council states rely on the Strait for over 80% of their caloric intake. The crisis has shifted toward fears about a humanitarian crisis following Iranian strikes on desalination plants, the source of 99% of drinking water in Kuwait and Qatar. The number of casualties or fatalities resulting directly from the military strikes and attacks remains unreported.
The request is a signalling tool to highlight the depth of U.S.-UAE relations.
Broader economic disruption is evident. The regional aviation sector, including Emirates and Qatar Airways, faced a near-total cessation of operations due to multi-national airspace closures, disrupting global air travel, multiple sources report. This collapse is part of a wider systemic failure.
Analysts note a profound shift in the region's long-term economic narrative. The war has caused a systemic collapse of the Gulf Cooperation Council economic model, research indicates. According to Deutsche Welle, Gulf states are unlikely to sustain high investment spending during or after the war. The conflict has been described as the 'end of the narrative' that the Gulf is a permanently safe destination for expatriates, immigrants, and tourists, according to the Middle East Council on Global Affairs.
The United Arab Emirates faces particular jeopardy. The UAE's future prospects as an economic, industrial, and touristic hotspot have been placed in jeopardy by the threat of regional escalation in the war between the U.S. and Iran, according to multiple reports. In a geopolitical signal, the UAE requested a dollar swap line with the U.S., which observers say may be more a threat to shift alliances rather than a sign of dollar shortage. The UAE central bank governor, Mohamed Balama, requested a currency-swap line with the U.S. from Treasury Secretary Scott Bessent while in Washington D.C. last week, according to The Wall Street Journal.
Questions surround the stability of the UAE's currency peg and potential geopolitical realignment. The UAE is facing pressure from the closure of the Strait of Hormuz, but experts say its economy is strong enough to maintain a dollar peg. The UAE dirham is pegged at 3.67 to the dollar and is currently trading at that level, research confirms. According to www.morningstar.com, Brad Setser, a senior fellow at the Council on Foreign Relations, described the UAE as not in emergency need of financial assistance, given its holdings of U.S. Treasurys and forex reserves over $250 billion. However, the swap request may reflect a signal that the UAE could turn to China and initiate a petroyuan program to replace the petrodollar, according to the Economist's Gregg Carlstrom. According to www.morningstar.com, Louis Gave, CEO at Gavekal Research, described the UAE as possibly sending a message to the U.S. that it could be replaced by China if the U.S. leaves the region. According to www.morningstar.com, Maximilien Hess, a senior fellow at the Eurasia Program at the Foreign Policy Institute, described the request as a signalling tool to highlight the depth of U.S.-UAE relations. According to www.morningstar.com, Tim Ash, a senior strategist at RBC Bluebay Asset Management, described sovereigns as not requesting swap lines lightly.