Economic Fallout from Persian Gulf Conflict Intensifies Globally

New York / London — The escalating conflict in the Middle East, centered around Iran, is triggering a significant “black swan” event – an unforeseen shock with widespread and destructive economic consequences. Whereas direct military action continues, an economic earthquake is radiating outward from the Persian Gulf, poised to impact nearly every nation.

Global Economic Impacts

Economists warn that no country will be immune to the repercussions of the conflict. Josh Lipsky, chair of international economics at the Atlantic Council, stated, “No one’s a winner in this situation.” The recent intensification of the energy shock, following Iranian strikes on Qatari liquefied natural gas (LNG) hubs in retaliation for Israel’s attack on Iran’s South Pars natural gas field, is a primary driver of these concerns.

Disruptions in Asia

Several Asian nations are already experiencing significant economic strain. Pakistan has temporarily closed schools for two weeks, and India is rationing natural gas supplies to manufacturers. In Pune, India, gas-powered crematoriums have suspended operations due to supply constraints. The Persian Gulf is a critical energy source for many Asian economies.

South Korea has imposed its first wholesale fuel price cap in 30 years. Pakistan has as well implemented measures such as cutting some government salaries to manage its budget. Thailand has ordered some officials to function from home, and the Philippines has adopted a four-day work week. Bangladesh is facing widespread natural gas rationing, impacting clothing manufacturers and leading to production cuts, as noted by research firm Wood Mackenzie.

China’s Position

China, Asia’s largest economy and a major importer of Iranian oil, may be relatively more insulated due to its reliance on coal for energy and its growing adoption of electric vehicles and renewable energy sources. Julian Evans-Pritchard, head of China at Capital Economics, suggests that China’s substantial crude oil reserves (estimated at 120 days’ worth) could even provide a competitive advantage to Chinese manufacturers as rivals face rising production costs.

Europe’s Familiar Concerns

For European nations, the current energy shock evokes memories of the crisis following Russia’s invasion of Ukraine. European governments had begun diversifying away from Russian energy, with the Persian Gulf becoming a key alternative supplier. However, the disruption of Qatari LNG supplies is driving up global prices.

Since the start of the conflict, at least 11 tankers carrying gas bound for Europe have been rerouted to Asia, where higher bids have prevailed, according to Gillian Boccara, senior director of gas and power at commodities intelligence provider Kpler. Natural gas prices in Europe have almost doubled since the beginning of the war. Belgian Prime Minister Bart De Wever warned that persistently high energy prices could lead to “deep trouble” for the EU.

United States’ Relative Resilience

The United States, while not entirely immune, is expected to be less affected than other regions. The development of fracking and a shift towards renewable energy sources have created a buffer against oil and energy shocks. Joe Brusuelas, chief US economist at RSM, acknowledged that the war will create an “economic drag,” but emphasized that the US is not facing the same level of “demand destruction” as some Asian economies.

Despite domestic energy production, US refiners are not fully equipped to process the specific type of crude oil produced in the United States, contributing to a more than 30% increase in gas prices over the past month, reaching an average of $3.88 from $2.92.

Political Implications for the US

Rising gas prices pose a financial challenge for consumers and a political problem for President Donald Trump and Republicans leading into the midterm elections. However, Brusuelas believes that the energy shock alone is unlikely to trigger a recession in the US, currently estimating the recession probability at 30%, up from 20% before the war.

The global nature of commodity markets means even a net exporter like the United States won’t be fully insulated from higher prices.