The conflict is upending lives and livelihoods in the region and beyond, dimming the outlook for many economies, according to research from eight sources. Energy prices, supply chains, and financial markets are the main transmission channels for the war's economic impact, with regional effects varying significantly. The war could lead to higher prices and slower growth globally, with outcomes depending on conflict duration, spread, and damage.
Fatih Birol, head of the International Energy Agency, stated that the current global energy crisis is more severe than the oil shocks of 1973 and 1979 and the 2022 gas shortage. According to the IEA Executive Director, global supply losses total about 12 million barrels per day, compared with about 5 million barrels per day in 1973 and 1979. However, other research indicates the current energy shock involves around 10% of global oil production cuts, similar to the 1973 oil shock, but notes oil prices are only 60% higher now, highlighting differing assessments of the crisis's historical severity.
Energy is the main transmission channel, with the de facto closure of the Strait of Hormuz and damage to regional infrastructure causing the largest disruption to the global oil market in history, the International Energy Agency said. 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, though other estimates suggest 25 to 30 percent, affecting assessments of the blockade's impact. Energy shipments from the Middle East have been at a standstill following Iran's threats to attack vessels in this key trade waterway.
The bombing of Iran’s South Pars field and retaliatory strikes on the world’s largest LNG facility in Qatar have threatened to escalate and prolong the conflict, research from eight sources indicates. The strikes triggered a spike in oil prices towards US$120, driving government bond yields higher. Oil prices have soared to close to $120 a barrel due to these attacks and the effective closure of the Strait of Hormuz.
The war has caused serious disruption to the economies of the most directly affected countries, including damage to infrastructure and industries that could become long-lasting, according to research. Fatih Birol noted that the cure is opening up the Strait of Hormuz, as current measures only buy time, but the exact extent of infrastructure damage in the Middle East remains unclear.
The blockade has led to a global oil shortage, affecting Gulf-reliant Asian countries like the Philippines and Indonesia. China uses an estimated 15 to 16 million barrels of oil daily, with Gulf countries accounting for over 10% of its imports each from Saudi Arabia and Iran, market analysts report. Russian oil accounts for nearly a fifth of China's energy imports, making Moscow its biggest oil supplier, research shows.
Rising energy prices and supply risks are rippling through Europe’s economies, adding to inflationary pressure. European Commission President Ursula von der Leyen said the EU’s bill for oil and gas imports increased by around 6 billion euros since the conflict began. Benchmark Dutch TTF natural gas futures have jumped nearly 80 percent over the past month, while Brent crude futures have surged by more than 40 percent, according to research. The OECD cut its euro zone growth forecast to 0.8 percent and raised its inflation outlook to 2.6 percent.
Around 60 percent of European power prices are linked to natural gas, increasing exposure to energy shocks, stated Daan Struyven, Goldman Sachs Co-Head of Global Commodities Research. Shell CEO Wael Sawan warned Europe could face fuel shortages within weeks if disruptions to Middle East oil flows persist. Germany’s economy and energy minister, Katherina Reiche, said energy supply pressures could intensify between late April and May if the conflict drags on. Fatih Birol added that the biggest problem today is the lack of jet fuel and diesel, with shortages likely to reach Europe in April or early May, though specific timelines for potential fuel shortages in Europe and Asia are uncertain.
Energy importers are more exposed than exporters, poorer countries more than richer ones, and those with meager buffers more than those with ample reserves, research indicates. Large energy importers in Asia and Europe are bearing the brunt of higher fuel and input costs. Parts of the Middle East, Africa, Asia-Pacific, and Latin America face higher food and fertilizer prices and tighter financial conditions. The UK and Europe look more exposed than the US due to reliance on imported energy, affecting consumer spending and growth, according to Jonathan Raymond, investment manager at Quilter Cheviot.
Low-income countries are especially at risk of food insecurity and may need more external support, though how these countries plan to secure such support is unknown. This adds to the broader economic strain from the conflict.
Global equities have given up their year-to-date gains, with the MSCI ACWI down -2.57% as of March 23, research shows. According to Charles Stanley Direct, 61% of self-directed investors are concerned about their investments not recovering following the ongoing conflict. Research indicates 70% of DIY investors are concerned about geopolitical risks, 59% about investment risk levels, 59% about holding nerve, and 57% about missing opportunities.
Investors have been too complacent about the war's impact, with markets moving from pricing two cuts to four rises in UK base rates, said Guy Miller, market strategist at Zurich. 58% of DIY investors are concerned about delays to further interest rate cuts from the Bank of England. Energy, technology, and AI are top assets where investors are looking to increase exposure. Guy Miller also stated that cash is the asset class to park money for now, as all economies and equity markets are expected to suffer.
The IEA, IMF, and World Bank created a joint coordination group to address economic and energy fallout from the war. The group will monitor market disruptions, align policy analysis, and deliver targeted financial support to affected countries, though the specific measures being taken remain unclear. Fatih Birol announced that the IEA has decided to release 400 million barrels from emergency oil reserves, the largest such move ever.
US President Trump issued Iran an ultimatum to reopen the Strait of Hormuz within 48 hours or face power plant obliteration, later lifting the deadline after talks, according to research. Iran responded by saying no negotiations have taken place with the US. How long the Strait of Hormuz is expected to remain closed, and the conditions for reopening, are key unknowns affecting global supply.
The crisis compares to the US recession of 1990, where an energy shock led to a cyclical downturn, according to Dario Perkins, economist at TS Lombard. This historical parallel underscores the potential for prolonged economic strain if the conflict continues, with the war's duration and further escalation remaining critical factors in the global outlook.