With relentless bombing of Iran by Israel and the USA, and with Iranian counterattacks on Gulf states, the costs of the war are mounting. The most obvious are in terms of human lives, injuries and suffering. But there are significant economic costs too. Some of these are immediate, such as the rising price of oil and hence the costs of fuel, or the fall in stock market prices. Some will be longer term, depending on how the war develops. For example, prices could rise more generally as supply chains are disrupted.
The impacts will vary across the world and across markets. The most obvious markets to be affected are those where significant supply comes from the Persian Gulf. Approximately 20% of total global oil consumption passes through the Strait of Hormuz, which connects the Persian Gulf with the Arabian Sea and the Indian Ocean.
Oil prices rose by 33% in the days following the start of the war on 28 February, with Brent crude, a key measure of international oil prices, rising from $71.3 on 27 February to $103.3 per barrel by 9 March. It was likely that they would rise even further in the short term. (Click here for a PowerPoint of the chart.)
Rising oil prices will drive up inflation. For those countries with a heavy dependence on Gulf oil, particularly countries in Asia, there could be significant supply problems. For oil exporters in the Persian Gulf, with tankers unable to traverse the Strait of Hormuz, the economic impact is huge. Oil exporters outside the Gulf, such as Russia, Norway and Canada, however, will gain from the higher prices. Clearly the size of these effects will depend on how long the conflict continues and how long the Strait of Hormuz remains closed.
And it is not just oil that is affected. Other products, such as liquified natural gas (LNG), petrochemicals, industrial materials, fertilizers, metals and minerals are transported through the Strait of Hormuz. Gulf countries import much of their food through the Strait.
There is great uncertainty about how long the conflict will last. There is also a lack of clarity and consistency from the US administration about its war aims. This uncertainty has affected financial markets, which have seen considerable volatility. Stock markets have seen widespread falls, with airline, travel and AI-heavy stocks being particularly vulnerable.
If the war is concluded relatively swiftly, the economic effects could be relatively small. If the war continues, and especially if the Gulf countries are drawn further into the conflict and if the conflict spreads to other countries, the economic effects could be much more substantial. A prolonged conflict could see oil prices remaining above $100 per barrel, potentially increasing global inflation by 1 percentage point or more. This would slow or halt the move by central banks to cut rates and thereby reduce global economic growth.
Then there is the issue of a potential new international refugee crisis. If the economic and political system in Iran deteriorates rapidly, this could trigger a wave of migration to neighbouring countries, such as Turkey, already hosting large numbers of refugees. Many could seek sanctuary further afield in Europe, with several countries already facing a backlash against immigration. The political and economic effects of this on host countries could be significant.
Articles
- Assessing the global economic impact of the Middle East war
- How will the Iran war affect the global economy?
- Iran war is latest threat to a global economy rattled by Trump
- Why an Iran war inflation shock could wreck global economic recovery
- Why surging oil prices are a shock for the global economy – but not yet a crisis
- Strait of Hormuz: Factsheet
- How the Iran Conflict May Fuel a New International Refugee Crisis
ING, Carsten Brzeski, Warren Patterson, James Knightley and Deepali Bhargava (5/3/26)
Chatham House, Neil Shearing (6/3/26)
Aljazeera, John Power (7/3/26)
The Guardian, Phillip Inman and Kalyeena Makortoff (8/3/26)
The Conversation, Stella Huangfu (3/3/26)
IEA (February 2026)
Forbes, Andy J Semotiuk (5/3/26)
Questions
- Who are the biggest gainers and losers from disruption to oil supplies from the Persian Gulf?
- Illustrate the effect of the current oil price shock on an aggregate demand and supply diagram (either static or dynamic).
- Why is the Iranian war likely to be less damaging to the European economy than the Ukrainian war has been?
- Why have AI-related stock prices been vulnerable to the uncertainty caused by the Iranian war?
- How are the Bank of England and the Federal Reserve Bank likely to respond to the rising price of oil and the broader economic effects of the war? Why might their responses be different?
- What is the likely impact of the Iranian war on global economic recovery?
- How might the Iranian war affect global economic alliances?
- How is the current oil price shock likely to affect the eurozone? Will it be different from the oil price shock that followed the Russian invasion of Ukraine?
- What are the likely economic effects of large-scale migration caused by the war?