Oil, missiles, and markets: The economic impact of the Iran-Israel war

Ever since Israel’s war on Iran began, tit-for-tat strikes on economic hubs, critical infrastructure, military bases, and nuclear power sites have become the ‘new normal’.

But with Sunday’s US airstrikes on three Iranian nuclear enrichment facilities - Natanz, Isfahan, and Fordow - the crisis has become even more unpredictable.

The use of Washington’s bunker-busting 30,000-pound bombs to target Iran’s deep and heavily fortified Fordow nuclear enrichment facility signalled the US’s entry into Israel’s war, with President Donald Trump warning of additional strikes and even hinting at “regime change”.

A day after the attack, the Iranian military vowed a “decisive strike” in response. From choking vital oil routes such as the Strait of Hormuz to managing nuclear fallout and a global recession, the economic risks of the crisis could be unprecedented.

Oil prices surge amid disruption fears

At least for now, the war remains localised to Iran and Israel. In the Gulf, most markets opened higher following US strikes as investors assessed the potential economic impact of the escalating regional conflict.

Though it is pushing oil prices to their highest levels in months and reviving fears of broader economic instability, the situation is still relatively under control, with Brent crude jumping by 8% in the days following Israel’s 14 June airstrikes on Iranian military sites, and briefly topping $78.50 per barrel before stabilising slightly lower. 

As per the International Monetary Fund (IMF), inflation rises by nearly 0.4% for every 10% increase in oil prices. Any frictions in the Middle East cause oil prices to spike due to supply constraint fears. Shipping premiums often rise in tandem, and the cost is handed down to the consumer and trickles across the economy. 

Interestingly, though, whenever an Iran-Israel truce has been hinted at, a $1 per barrel drop has been reported.

Omid Shokri, an energy strategist and senior visiting fellow at George Mason University in Washington, told The New Arab that the major risk would be the disruption of Gulf oil flows, particularly through the Strait of Hormuz, which could “trigger a global energy crisis, skyrocketing oil prices, and economic slowdowns in Asia and Europe”.

Pointing out that financial markets have already reacted with volatility, Shokri observed that “investors have shifted away from equities towards safer assets and sectors reliant on stable energy prices, and uninterrupted trade flows, such as manufacturing and technology, face rising uncertainty, and potential disruption”.

Shokri said that “energy, transportation (aviation and shipping), and financial markets would be most affected by the conflict”, while energy prices would rise in Asia and Europe.

The Strait of Hormuz

After Washington’s use of military force against Iran, Tehran responded with threats to strike US bases in the Middle East or block the Strait of Hormuz. A strategic global shipping route handling 20% of the world’s energy supplies, the Strait of Hormuz is a narrow passageway between Oman and Iran.

Pricing in the risks from such a closure, analysts at JP Morgan have assessed that a full-scale disruption of the Strait could drive Brent crude beyond $130 per barrel.

Even while the conflict remains contained to Israel and Iran, the temporary removal of Iran’s own 1.1 million barrels per day (bpd) from the global market could cause oil to breach $90 per barrel, as it is OPEC’s third-largest producer, according to Citibank analysts.

Though it is unclear how long and how effectively Iran would be able to implement a closure of the channel, there would be global ripple effects even if it is for a short duration, as it could degrade the energy security of China, and endanger the oil-based economies of most of the Gulf Cooperation Council (GCC) states.

Even before matters reached this point, India and Pakistan were weighing their options in case the conflict disrupts oil supplies.

However, Washington is not concerned about Middle Eastern oil as it has its own oil reserves. “We don’t see the same sort of urgency that we might’ve expected a few years ago, when the U.S. was more concerned about its energy dependence on the Middle East,” Jennifer Welch, chief geo-economics analyst for Bloomberg Economics, told the New York Times.

In a bid to avoid the Persian Gulf as much as possible, QatarEnergy, the world’s largest LNG exporter, has been asking its vessels to wait outside the Strait until ready to load.

Even other ships are trying to stay further south within Omani waters or close to the Emirati Ras Al Khaimah coast, avoiding the Iranian ports as much as possible, but added sea traffic increases the possibility of collision.

Nuclear fallout

Airstrikes on nuclear facilities can spread radiation in an extended area, especially from the sites located closer to the GCC. However, the Saudi Nuclear and Radiological Regulatory Commission (NRRC) has confirmed that no radioactive effects were detected in the environment of the Kingdom or other Arab states as a result of the US military attacks on nuclear facilities in Iran.

The Director General of the International Atomic Energy Agency (IAEA), Rafael Mariano Grossi, had recently commented on X that the attacks on Iran’s nuclear sites had already degraded nuclear safety and security, and while no radiological release has affected the public yet, the danger remains.

Any radiation leak from Iran’s nuclear sites would increase the risk of water and air contamination for the Gulf Cooperation Council (GCC), but Bushehr, which was closest to the GCC, has not been hit.

Side effects of the Iran-Israel conflict

The military conflict has had a severe impact on civil aviation, with global airlines extremely risk-averse.

Due to ongoing missile strikes, several countries have shut their airspace, and various airlines have suspended or cancelled their Middle Eastern flights.

Air routes have been changed to fly over Afghanistan, leading to flights of longer duration. At the same time, tourism in the Middle East has received a major setback due to security risks, with many tourists stranded.

The travel chaos has come at a time when the Middle East’s tourism sector was witnessing a surge of visitors.

Meanwhile, economic instability and a lack of security can be expected to persist in the long run. Before the conflict, growth forecasts for the GCC region were bright, and the World Bank had predicted an increase in economic growth for 2025-26.

Zeeshan Shah, an analyst at FINRA in Washington, told TNA that Iran has suffered the worst setbacks, but if the “war expands due to US intervention”, the Gulf Arab states “stand to lose more if the Strait of Hormuz is sealed by Iran”.

Shah said that India’s investment in Chabahar Port would also be under serious threat due to a weakened Iran, while oil markets would be the "worst affected”, causing prices to skyrocket and weakening economic growth the world over.

An extended conflict could potentially create up to 20-30 million refugees, and Shah said there would be issues for bordering countries like Pakistan, and separatist movements in Iran could become energised. Therefore, in his opinion, Iran should reach an agreement with the US, which would “then make the US force Israel to stand down”.

Economic instability due to regional destabilisation

In Shokri’s assessment, the long-term economic effects of the Iran-Israel conflict can be “profoundly destabilising for both the region and the world” as the risk of “broader regional involvement is high”.

Predicting that both Iran and Israel would face the most severe setbacks in the event of a full-scale war, he noted that Israel has already “devastated Iran’s nuclear and military facilities” while Iran has “breached Israel’s air defences and inflicted significant civilian and economic damage”.

Therefore, there is “potential for spillover into fragile states which could exacerbate humanitarian disasters, while heightened terrorist activity and the involvement of global powers increase the risk of a broader international conflict,” he said.

“Beyond the immediate belligerents, countries like Lebanon, Syria, Iraq, and Yemen, where Iranian proxies operate, risk becoming secondary battlegrounds and the Gulf monarchies could be targeted if Iran perceives them as aiding the other side,” Shokri added.

Comprehensive peace would require “bold diplomatic initiatives that address not only the immediate conflict but also the broader Israeli-Palestinian issue”. 

Though prospects for peace currently appear slim as diplomatic channels are largely stalled and both sides remain entrenched, Shokri believes there are faint signs of possible de-escalation.

Sabena Siddiqui is a foreign affairs journalist, lawyer, and geopolitical analyst specialising in modern China, the Belt and Road Initiative, the Middle East, and South Asia.

Follow her on X: @sabena_siddiqi