In the most optimistic outlook for the global economy, the latest conflict in the Middle East ends within weeks, with the region continuing its oil and gas production. Shipping through the Strait of Hormuz resumes, averting a shock to global energy supplies and easing inflation fears.
However, experts warn against premature optimism. The American and Israeli attacks on Iran, coupled with Iranian retaliations across the region, have set in motion risks that could seriously threaten the global economy.
Of greatest concern is the possibility that Iran, feeling cornered, might escalate its retaliation despite the likelihood of intensified bombing on its own territory. Such moves could target the oil and gas infrastructure of regional powers like Qatar and Saudi Arabia.
Any prolongation of the conflict or disruption to energy supplies would likely drive energy prices higher, fueling inflation. This could prompt central banks worldwide to raise interest rates, increasing borrowing costs for mortgages, car loans, and other credit, thereby curbing consumer spending and business investment—classic triggers of a downturn.
“We’re in a very precarious period,” said Kenneth S. Rogoff, former IMF chief economist and Harvard professor. Drawing a parallel to history, Rogoff noted the unpredictability surrounding events like the assassination of Archduke Ferdinand that sparked World War I, which many initially thought would be brief.
The crux of current concern is the stability of Middle Eastern energy supplies, which account for 30% of the world’s oil and 17% of its natural gas. Any disruption would impact major importers, especially economies in East Asia and Europe.
Historic comparisons hark back to the 1970s oil crises, when OPEC imposed supply cuts that forced Americans to endure gas shortages, long lines, and soaring prices. The Strait of Hormuz, a vital shipping lane hosting about 20% of global oil flow, saw heightened tension then as now.
Yet, differences exist today. OPEC+ has pledged to boost production to offset potential shortfalls, and U.S. oil production has surged, resulting in a general global supply surplus. Moreover, many countries have pursued energy independence since the 1970s and invested heavily in renewables, led by China and Europe, mitigating some risks.
Nonetheless, global reliance on fossil fuels persists. Prolonged disruption through the Strait of Hormuz or damage to refineries from Iranian missile attacks would outweigh any immediate advantages from cleaner energy sources. Such damages could also impede petrochemical production, including fertilizers, raising food costs and threatening nutrition in vulnerable regions like sub-Saharan Africa and South Asia.
“Oil and gas are still extremely important,” noted Kjersti Haugland, chief economist at Norway’s DNB Carnegie. The green energy transition remains a long-term project.
Oil prices surged over 10% recently amid concerns about Middle Eastern energy exports but later retreated somewhat as fears eased. However, major economies including China, Japan, Germany, South Korea, Taiwan, Italy, and Spain—already grappling with trade tensions and increasing material costs—now face potential fuel price spikes if the conflict endures.
Adnan Mazarei, senior fellow at the Peterson Institute for International Economics, highlighted Europe and East Asia’s vulnerability due to their heavy reliance on imported energy.
The stakes were underscored when Qatar halted liquefied natural gas production due to transport risks through the Strait, triggering a 50% jump in European natural gas prices.
China, reliant on Iran for over 13% of its oil imports, faces added pressure amid a depressed real estate market affecting household wealth.
India faces its own challenges. After pledging to reduce Russian oil imports to ease U.S. tariff pressures, India sought alternatives from Gulf suppliers now threatened by the conflict. Additionally, with around 9 million Indian migrant workers in the Gulf supporting remittances critical to India’s economy, disruptions could have widespread consequences.
The U.S., while the world’s top crude oil producer and LNG exporter, would see consumers pay more at the pump, which could raise costs throughout the economy. Though U.S. energy firms might benefit financially, rising fuel prices would add inflationary pressure.
This dynamic underpins expectations that President Trump will seek a swift end to hostilities to prevent escalating energy costs ahead of November’s congressional elections, especially given his electoral base’s sensitivity to grocery and fuel prices.
However, longer-term consequences include increased military spending to replenish supplies, adding to national debt and likely influencing interest rates and inflation.
“We’re going to end up spending a lot more on the military, and it’s going to have implications for interest rates and inflation,” Rogoff said. “That’s baked in the cake.”
This report originally appeared in The New York Times.
Special Analysis by Omanet | Navigate Oman’s Market
The ongoing Middle East conflict poses significant risks to Oman’s oil and gas exports, especially if the Strait of Hormuz faces prolonged disruption, potentially causing energy prices to surge and inflationary pressures to rise globally. Businesses in Oman should brace for heightened market volatility while entrepreneurs and investors must consider diversifying into renewable energy and resilient supply chains to mitigate geopolitical risks. Strategic foresight into energy security and global demand fluctuations will be crucial for maintaining economic stability and capturing new growth opportunities amid growing uncertainty.
