Global economic optimism dims as the Iran war drags on

U.S. and Israeli military operations against Iran have triggered a global economic crisis that extends far beyond the immediate conflict zone, sending energy prices soaring and threatening long-term damage to the world economy.

What initially appeared to be a contained regional conflict has evolved into what the International Energy Agency describes as “the largest supply disruption in the history of the global oil market.” The escalating strikes and counterstrikes targeting Persian Gulf energy infrastructure have severely disrupted global oil and gas flows, with repercussions that experts warn could last for years.

“A week ago or certainly two weeks ago, I would have said: If the war stopped that day, the long-term implications would be pretty small,” said Christopher Knittel, an energy economist at the Massachusetts Institute of Technology. “But what we’re seeing is infrastructure actually being destroyed, which means the ramifications of this war are going to be long-lived.”

The conflict took a critical turn when Iran effectively closed the Strait of Hormuz by threatening tankers attempting to navigate the strategic waterway. This choke point, which normally facilitates passage for about 20% of the world’s oil, became virtually impassable, forcing major Gulf exporters like Kuwait and Iraq to cut production without access to global markets.

Oil prices have responded dramatically, with Brent crude climbing to $105.32 per barrel on Friday—up from approximately $70 before hostilities began. U.S. benchmark crude has similarly surged to $99.64 per barrel, representing a nearly 50% increase. These price spikes are reviving uncomfortable economic memories, with Knittel noting that “historically, oil price shocks like this have led to global recessions.”

Among the most devastating attacks was Iran’s strike on Qatar’s Ras Laffan natural gas terminal, which normally produces 20% of the world’s liquefied natural gas. State-owned QatarEnergy reports that the March 18 attack eliminated 17% of Qatar’s LNG export capacity, with repairs expected to take up to five years.

The economic consequences extend well beyond energy markets. The Persian Gulf region accounts for approximately one-third of global urea exports and a quarter of ammonia exports—both crucial fertilizers for agricultural production. With up to 40% of world nitrogen fertilizer exports normally passing through the now-blocked Strait of Hormuz, prices have jumped dramatically—urea by 50% and ammonia by 20%.

These fertilizer shortages particularly threaten countries like Brazil, which imports 85% of its fertilizer needs. The likely outcome will be higher food prices and reduced yields as farmers reduce fertilizer usage, with the greatest impact falling on vulnerable populations in developing nations.

The conflict has also disrupted global helium supplies, as Qatar’s damaged Ras Laffan facility provides approximately one-third of the world’s helium—a critical component for semiconductor manufacturing, aerospace applications, and medical imaging equipment.

While wealthy nations can better absorb price shocks, developing countries face severe challenges. “No country will be immune to the effects of this crisis if it continues to go in this direction,” warned IEA head Fatih Birol on March 23, adding that poorer countries will face the most acute shortages “because they will be outbid when competing for the remaining oil and natural gas.”

Asian economies are particularly exposed, as more than 80% of oil and LNG that typically passes through the Strait of Hormuz is destined for Asian markets. Governments across the region have implemented emergency measures: the Philippines has reduced government office operations to four days weekly and restricted air conditioning use; Thailand has directed public workers to avoid elevators; and South Korea has reinstated fuel price caps abandoned in the 1990s.

India, the world’s second-largest importer of liquefied petroleum gas used for cooking, has prioritized household access over business needs and absorbed much of the price increases to shield vulnerable families. Nevertheless, LPG shortages have forced restaurants to reduce hours or eliminate energy-intensive dishes from their menus.

The United States, while somewhat insulated as an oil exporter, still faces significant challenges. Average gasoline prices have jumped to nearly $4 per gallon from $2.98 a month ago, straining consumers already frustrated by inflation. “Nothing weighs more heavily on consumers’ collective psyche than having to pay more at the pump,” noted Mark Zandi, chief economist at Moody’s Analytics.

This energy shock comes at a particularly vulnerable moment for the U.S. economy, which had already slowed to 0.7% annual growth in the fourth quarter of 2024 after recording 4.4% growth in the previous quarter. February’s unexpected loss of 92,000 jobs further underscores the fragility of the economic situation, prompting Gregory Daco, chief economist at EY-Parthenon, to raise the odds of a U.S. recession to 40% over the next year.

The global economic outlook has darkened considerably as the conflict persists. Initial hopes that the world economy could quickly rebound—as it did following the COVID-19 pandemic and Russia’s invasion of Ukraine—have faded as damage to critical energy infrastructure mounts.

“Some of the damage to LNG facilities in Qatar will likely take years to repair,” observed Lutz Kilian, director of the Center for Energy and the Economy at the Federal Reserve Bank of Dallas. “The process of recovery will be slow even under the best circumstances.”

As Zandi and his colleagues concluded: “There is no economic upside to the conflict with Iran. At this point, the questions are how much longer the hostilities will continue and how much economic damage they will cause.”