Middle East Conflict Triggers Global Energy Crisis, Straining Economies

The conflict is upending lives and livelihoods in the region and beyond, dimming the outlook for many economies, according to research from seven sources. Energy is the main transmission channel for the war's economic impact, with oil prices soaring to close to $120 a barrel due to strikes on shipping and energy infrastructure and the effective closure of the Strait of Hormuz. This de facto closure, along with damage to regional infrastructure, is causing the largest disruption to the global oil market in history, the International Energy Agency said.

The Strait of Hormuz is a critical chokepoint, with about a fifth of the world's oil, around 20 million barrels each day, passing through it, according to estimates from the US Energy Information Administration. Energy shipments from the Middle East have been at a standstill following Iran's threats to attack vessels in the waterway as retaliation against US-Israeli strikes. This blockade has led to a global oil shortage, rocking Gulf-reliant Asian countries hard, with the Philippines mandating four-day work weeks to save fuel and Indonesia seeking ways to avoid burning through reserves.

The shock is global but asymmetric, with energy importers, poorer countries, and those with meager buffers more exposed, research indicates. Economies heavily dependent on oil imports in Africa and Asia are finding it increasingly hard to access supplies, even at inflated prices. Parts of the Middle East, Africa, Asia-Pacific, and Latin America face higher food and fertilizer prices and tighter financial conditions, with low-income countries at risk of food insecurity. All scenarios lead to higher prices and slower growth, depending on conflict duration, spread, and damage to infrastructure and supply chains.

China is testing its resilience to a Gulf oil supply shock due to the war's disruption of a key global shipping route. The country is feeling strain as the world's largest buyer of oil but is in a better position than neighbours due to years of statecraft preparing for an energy crisis, research suggests. China uses an estimated 15 to 16 million barrels of oil daily, mainly for transportation, with much coming from abroad, according to market analysts. Russian oil accounts for nearly a fifth of China's energy imports, making Moscow its biggest oil supplier despite sanctions, while coal remains the dominant source of power for most of China's electricity.

Rising energy prices and supply risks are rippling through Europe's economies one month after US and Israeli strikes on Iran. Oil and gas prices have surged, shipping routes disrupted, and power markets tightened, adding to inflationary pressure and weighing on industry and households in Europe. Economists warned elevated energy prices and supply uncertainty could have a systemic impact on Europe's industrial base, particularly in Germany. According to Goldman Sachs Co-Head of Global Commodities Research Daan Struyven, around 60% of European power prices are linked to natural gas, increasing exposure to energy shocks.

Analysts observe these developments underscore Europe's vulnerability to imported energy, straining economic resilience and green transition strategy. Benchmark Dutch TTF natural gas futures have jumped nearly 80% over the past month, while Brent crude futures have surged by more than 40%. The OECD cut its euro zone growth forecast for this year to 0.8% and raised its inflation outlook to 2.6%.

UK ministers are considering plans to give funds to families hardest hit by the energy crisis via local councils, under the Crisis and Resilience Fund. The chancellor, Rachel Reeves, is examining plans to support households with energy bills forecast to hit nearly £2,000 a year from July, but ruled out universal support. An extension of the CRF would allow households with high bills but not qualifying for benefits to apply for grants.

Thinktanks have been urging the government to move quickly to identify the poorest households for support. Torsten Bell, who is coordinating the government's response, is concerned about bailouts only targeted at benefit claimants attracting negative headlines. Between 2022 and 2024, households in the top 10% of earners received an average of £1,350 of direct energy bill support, according to Treasury calculations.

Sainsbury's CEO Simon Roberts said shoppers will not see food prices rise until at least the summer, according to major media reports. He stated effects of the war are unlikely to hit food prices until the summer at the earliest because many farmers had bought fertilizer and fuel before the disruption and many businesses had hedged commodity costs. Roberts added that Easter will be unaffected by the conflict regarding food prices. The impact will become clearer in three to five weeks and is helped by the British growing season getting under way, meaning food imports will be lower until autumn.

Sainsbury's has long-term agreements with suppliers to help protect shoppers from inflation, Roberts said. By the end of this year, 60% of Sainsbury's own-brand suppliers of fresh produce, dairy, meat, fish, and poultry, covering 2,500 farms, will have agreements covering five or more years, according to the company. Berry farmers are the latest group to join Sainsbury's long-term agreement scheme, with apple and pear producers expected to follow soon. Sainsbury's has signed a new five-year deal with a berry producer in Kent as part of a plan to invest £5bn in longer-term contracts.

Roberts called on the government to ease planning restrictions to help expand UK food production. Sainsbury's has become adept at dealing with volatile trading conditions after more than five years of significant disruption, Roberts noted.

Farmers across the world are facing rising costs due to the closure of the Strait of Hormuz affecting about a third of global seaborne trade in fertilizers, major media reports indicate.

Sainsbury's faced an extra £140 million cost from a rise in national insurance contributions in April and tens of millions from new regulatory costs on packaging. However, Sainsbury's upgraded its annual outlook, expecting retail earnings of more than £1 billion after a better-than-expected half-year performance. Britain's main minimum wage rate jumps a further 4.1% from April.

Government borrowing costs have climbed worldwide since the US and Israel attacked Iran, with higher bond yields. Prolonged escalation could cause energy price spikes to spill over into core economic indicators like inflation, interest rates, trade balances, and GDP growth. UK grocery inflation was 4.3% in the four weeks to December 28, easing from 4.7% in the previous period. Global energy markets dependent on imported fossil fuels are at the mercy of global commodity markets due to the Middle East crisis.

Commodity prices are likely to be more stable in 2026, and Sainsbury's isn't facing the same hike in employer social security costs as in 2025. Roberts is expected to be among retailers meeting with Chancellor Rachel Reeves this week to discuss the effects of the Iran conflict.

Key unknowns persist, including how long the Strait of Hormuz closure will last and the timeline for resolving shipping disruptions. Whether other major retailers share Sainsbury's assessment that food prices will not rise until at least summer is also unclear. Europe could face fuel shortages within weeks if disruptions to Middle East oil flows persist, according to Shell CEO Wael Sawan. Energy supply pressures could intensify between late April and May if the conflict drags on, Germany's economy and energy minister Katherina Reiche noted. Renewable energy offers a strategic hedge against commodity market volatility, IEEFA analyst Sam Reynolds stated.