Middle East Conflict Triggers Global Energy Crisis

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. Since the U.S.-Israeli strikes on Iran began on February 28, Tehran has launched ballistic missiles targeting Israel, U.S. military bases, oil depots, and other infrastructure across the Gulf region. Iranian attacks on vessels in the Strait of Hormuz have dramatically reduced traffic in the channel, through which about 20% of global oil and gas supplies transit. As of Monday morning after February 28, Brent crude was priced at $106 per barrel, up more than 40% from $72 per barrel on February 27. Following closure of the Strait of Hormuz on March 4, 2026, oil and LNG exports were stranded, causing Brent crude to surge past $120 per barrel. The International Energy Agency characterized the 2026 Iran war, including closure of the Strait of Hormuz, as the largest supply disruption in the history of the global oil market, with the impact echoing the 1970s energy crisis through supply shortages, currency volatility, inflation, and risks of stagflation and recession.

Specific impacts on energy markets include severe disruptions to oil and liquefied natural gas (LNG) flows. According to analyst Muyu Xu, LNG prices have risen almost 60% since the start of the war. On March 2, QatarEnergy suspended its LNG production after an Iranian drone attack, straining the global LNG market. Prices of refined products have seen significant increases, expected to continue if energy flows through the Strait of Hormuz remain largely shut. About 84% of crude oil and 83% of LNG that passed through the Strait of Hormuz in 2024 was bound for Asia, with China, India, Japan, and South Korea accounting for nearly 70% of oil shipments through the strait and about 15% bound for the rest of Asia. Iranian oil exports in 2024 stand at an estimated 1.7 million barrels per day. Oil production of Kuwait, Iraq, Saudi Arabia, and UAE collectively dropped by 6.7 million barrels per day by March 10, and by at least 10 million barrels per day by March 12.

Contradictory views exist on the correlation between oil prices and Middle East regional risk. While the conflict has caused significant oil price spikes, there is consensus among oil market participants that the assumption of a correlation between oil price and Middle East regional risk is broken. Since October 7, 2023, conflict escalation has not sustained high oil prices, with Brent crude remaining in a range. The market understands energy infrastructure risk rather than broader political risk, with supply from non-OPEC and North America maintaining price stability. Oil shipments have found workarounds despite Houthi threats, with marginal effects on energy products and tradeable goods.

The war has caused a systemic collapse of the Gulf Cooperation Council economic model. Arab Gulf states and Iran rely on the Strait of Hormuz for energy exports and grocery imports, with only Saudi Arabia and UAE having limited alternative routes. The maritime blockade triggered a grocery supply emergency across GCC states, disrupting 70% of food imports by mid-March and causing 40-120% price spikes. GCC states rely on the Strait for over 80% of their caloric intake. Iranian strikes on desalination plants threatened drinking water in Kuwait and Qatar, which rely on them for 99% of drinking water. The regional aviation sector faced near-total cessation due to airspace closures, disrupting global air travel. Deutsche Welle reported Gulf states are unlikely to sustain high investment spending during or after the war.

Broader global economic consequences include postponed or increased interest rate reductions due to higher inflation from supply shortages and speculation. Stock markets declined globally and there was a global bonds market sell-off. The UNDP estimates Lebanon will suffer a 9.2% loss of GDP this year. Egypt has suffered revenue losses of billions per year due to decreased Suez Canal traffic.

Potential future scenarios for oil prices vary depending on the conflict's duration. According to a Capital Economics report, if the conflict is short-lived, oil and LNG prices would fall back sharply with Brent crude reaching $65 per barrel by year-end. In case of a longer war, oil prices would rise further to around $130 per barrel in the second quarter.

In the United Kingdom, the hospitality sector is facing challenges due to soaring costs, including food price inflation, labor costs from NICs and minimum wage increases. Tax rises and extra employment costs announced in October's budget came into force in April, raising employer NICs and lowering the threshold. The minimum wage was raised by 6.7% to £12.21 an hour. These measures are expected to raise £25bn a year, which the government says is needed to restore public services. UKHospitality warns the changes will cost the industry an extra £1bn, forcing some to cut jobs or slash investment.

Jonathan Lawson, chief executive of Butcombe Group, criticized Labour's handling of the economy and accused ministers of ignoring business. This year was quite difficult for us to plan already due to tax hikes and other costs even before the outbreak of war in the Middle East. Butcombe Group has over 130 pubs, bars and inns, mainly in the South of England. Lawson would challenge claims Labour is doing a good job on the economy after official figures showed output rose by 0.5 per cent in February. Butcombe Group had a very good year last year and invested significantly into its business. Rising costs and tax base from this and previous governments make it difficult for Butcombe Group to have confidence around investment and employment growth.

Specific tax and wage burdens on Butcombe Group include increases in national insurance contributions, the minimum wage, and business rates impacted business before the Iran war sent energy prices soaring. Latest increases in the national minimum wage have added to difficulties for Butcombe Group. Rachel Reeves’ national insurance tax raid and inflation-busting rise in the minimum wage cost Butcombe Group over £2 million last year. This month’s 8.5 per cent rise in the minimum wage for 18 to 20-year-olds to £10.85 per hour is alarming. The hourly minimum wage for 18 to 20-year-olds has gone up 26 per cent since Labour came to power. Ministers seek to put pay for 18 to 20-year-olds on a par with those aged 21 and over.

Warnings exist that the minimum wage rise is pricing the young out of work at a time when youth unemployment is at an 11-year high. Butcombe Group was handed a £150,000 saving when the Chancellor watered down her botched business rates reforms. The Chancellor watered down business rates reforms following a fierce backlash from the industry that saw Labour MPs banned from many pubs. Lawson dismissed the help on business rates, saying they have made a big deal out of what in context is a small amount of money for our business. The Government and Chancellor promised to reform business rates for the pub sector and retail but have still yet to deliver on their promise.

The Middle East's economy is fragmented, with poor regional integration in trade and investment. Israel's gas exports to Egypt and offshore production have remained resilient, with energy infrastructure intact.

Context: Pre-existing business challenges before the conflict added to economic pressures.

Implications: The duration of the conflict and its impact on economic stability remain uncertain.

Implications: The effectiveness of government policies and their impact on youth employment are unclear.

Implications: The resilience of Gulf economies during and after the war is uncertain.