Since US-Israeli strikes on Iran began on February 28, Tehran has launched ballistic missiles targeting Israel, US bases, oil depots, and infrastructure across the Gulf. Iranian attacks on vessels in the Strait of Hormuz have dramatically reduced traffic, with about 20% of global oil and gas supplies transiting through it. This has led to a global oil shortage, with oil prices soaring to close to $120 per barrel, according to multiple reports. The conflict's fallout is rippling through the global economy, with sharp increases in transport costs, energy and fertilizer prices, currency pressures, and financial market volatility, as noted by Hamza Ali Malik, Director of the Macroeconomic Policy Division at ESCAP.
Disruptions in the Strait of Hormuz have caused immediate energy price spikes. Following U.S. strikes on Iran and the temporary closure of the strait, oil and gas supplies from the Persian Gulf have been halted and global energy prices have soared. LNG prices have risen almost 60% since the start of the war, according to Muyu Xu, a senior crude oil analyst at Kpler. QatarEnergy suspended its LNG production after an Iranian drone attack on March 2, straining the global LNG market; Qatar supplies 20% of the world's LNG. Around 20% of global liquefied natural gas exports pass through the Strait of Hormuz, and LNG traffic has nearly stopped, with at least eleven tankers paused. Dutch TTF natural gas prices are up more than 50% against last Friday's close, fueling concerns of an energy-induced inflationary spike.
Asia bears a heavy reliance on Gulf energy, with vulnerabilities varying by nation. About 84% of crude oil and 83% of LNG passing 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. China would suffer significant economic costs from a long-term oil outage in the Middle East but fare better than Japan, South Korea, and Taiwan due to greater domestic production and lower oil intensity. A Middle East crisis with disproportionate LNG outages might benefit China, as it has domestic production and pipeline imports, while rivals like the EU and Japan are reliant on LNG imports. China uses an estimated 15 to 16 million barrels of oil daily, with Gulf countries accounting for more than 10% of imports each from Saudi Arabia and Iran, according to market analysts. Russian oil accounts for nearly a fifth of China's energy imports, making Moscow its biggest oil supplier despite sanctions, and coal is the dominant source of power for most of China's electricity, with China being the world's largest coal producer, accounting for over half of global production.
An eight-week airspace closure could result in 600,000 fewer international arrivals and losses of 41bn baht.
Japan faces acute economic challenges due to its energy dependence, inflationary pressures, and complex policy responses. Japan imports around 87% of its energy supply, with approximately 90% of crude oil and 11% of LNG from the Middle East transiting through the Strait of Hormuz. Prime Minister Sanae Takaichi noted that Japan holds around 254 days of oil reserves, but only two to three weeks of LNG feedstock for power generation, making electricity supply vulnerable to disruptions. Business sentiment among major Japanese manufacturers improved in March according to the Bank of Japan's quarterly tankan survey, with the diffusion index for large manufacturers rising to 15 from 14, the Bank of Japan said. The Bank of Japan's survey is expected to show a recovery at large manufacturers due to a weaker yen and strong demand in chip and AI sectors, but prospects for smaller non-manufacturers darken amid surging oil prices and tightening supply chains. Prime Minister Sanae Takaichi's cabinet approved a 21.3 trillion yen stimulus package to spur growth and relieve the impact of higher prices, while her plan to suspend sales tax on food for two years drew mixed reactions: 20% support, 29% oppose, and the remainder had no clear stance.
India is experiencing significant economic strain from soaring oil import bills and domestic impacts. India imports nearly 90% of its oil and half its gas, much from the Gulf, and millions of Indian workers in the region send home more than $50bn a year. India's rupee posted its biggest plunge in four years on Friday due to worries about soaring oil and gas prices driving up import bills and braking economic growth. The Restaurant Association of India estimates about a third of restaurants are significantly affected by economic constraints, with businesses cutting hours, shrinking menus, and relying on temporary fixes, according to its president, Sagar Daryani. Restaurants in India are taking slow-cooked dishes off the menu to conserve gas, while others have shut down altogether, research from ten sources indicates.
Thailand's tourism sector is being hit hard by flight cancellations and reduced arrivals. About 1,000 Thailand-bound flights have been cancelled since the war erupted, according to Aeronautical Radio of Thailand. Thailand's tourism ministry predicts an eight-week airspace closure could result in 600,000 fewer international arrivals and losses of 41bn baht. According to The Guardian, Suwarin Nantaya of Chiang Mai Trekking described tourism inquiries dropping from about 30 to 3 per day since the war erupted, with many pre-booked customers cancelling due to flight fears.
Japan holds around 254 days of oil reserves, but only two to three weeks of LNG feedstock for power generation, making electricity supply vulnerable to disruptions.
Sri Lanka has reverted to austerity measures, including fuel rationing, amid the crisis. Sri Lanka has reverted to using a QR system for fuel rationing introduced during the 2022 economic crisis, with long queues forming at fuel stations. In Sri Lanka, authorities have introduced fuel rationing, cut back public events, shifted schools to a four-day week, and scaled down public sector operations.
The broader global economic fallout includes sharp increases in transport costs, currency pressures, and market volatility. The immediate economic impacts include sharp increases in transport costs, energy and fertilizer prices, currency pressures, and financial market volatility, according to Hamza Ali Malik. Investors and consumers alike are filled with uncertainty about how much longer the war in Iran may last and what U.S. President Donald Trump might say next, major media reports. Japan's benchmark Nikkei 225 has gyrated wildly in recent weeks.
Semiconductor and electronics production is threatened by helium and gas shortages from the Gulf. Shortages of helium and specialised gases from the Gulf are creating a near-immediate crisis for semiconductor and advanced electronics production, said Rupa Chanda, Director of the Trade Division at ESCAP.
The immediate economic impacts include sharp increases in transport costs, energy and fertilizer prices, currency pressures, and financial market volatility.
Oil price projections and the conflict's duration remain key uncertainties. A Capital Economics report notes that if the conflict is short-lived, oil prices could fall to $65 per barrel by year-end, but in a longer war, prices could rise to around $130 per barrel in Q2, according to Neil Shearing and his team. The Middle East conflict will have a sharp and direct fallout on the global economy, affecting countries like China, India, and Europe more in the short run. About a fifth of the world's oil passes through the Strait of Hormuz, around 20 million barrels each day, according to the US Energy Information Administration. The Strait of Hormuz is 39km wide, connects the Arabian Gulf to the Arabian Sea, and is the only route to the open ocean for Gulf exports.
Historically, the Strait of Hormuz has been a critical chokepoint for global energy flows, and the current escalation marks one of the most severe disruptions in decades. The conflict's rapid expansion from targeted strikes to broader regional attacks on shipping and infrastructure has intensified risks beyond previous Middle East tensions.
Governments and businesses worldwide are scrambling to respond to the crisis. Many nations are tapping strategic petroleum reserves, seeking alternative energy suppliers, and implementing emergency measures to cushion economic impacts. Analysts and industry groups are issuing warnings about prolonged supply chain disruptions and advising contingency planning.
The implications for global recession risks and regional economic stability are growing. Prolonged energy price shocks could tip fragile economies into recession, exacerbate debt burdens in developing nations, and destabilize regions heavily dependent on remittances or tourism. The interconnected nature of global markets means that even countries with diversified energy sources face secondary effects through trade and financial channels.
Key unknowns persist, including the exact current oil price given varying reports, the duration and potential escalation of the Middle East conflict, and the specific impact on global semiconductor production timelines. The effectiveness of Japan's 21.3 trillion yen stimulus package in mitigating economic impacts and the likelihood and timing of the Bank of Japan's expected interest rate hike also remain unclear.