War In The Middle East: Economic Implications

For the United States, strikes on Iranian oil facilities would remove meaningful volumes from an already fragile global balance. This would produce a spike in inflation that would be at odds with U.S. preferences for lower fuel costs and looser financial conditions. The war effort is an expensive one, costing an estimated $5 billion per week.

Europe is not directly involved in the conflict, yet the situation risks creating the most severe energy shock since the Ukraine war. Europe sources only about 10% of its LNG from Qatar, though the share rises to one-third for Italy. An immediate shortage this winter appears unlikely, given continued pipeline flows from Norway.

However, disruptions in Hormuz would intensify competition for alternative supplies, echoing dynamics seen during the 2021-23 energy crisis. Unlike East Asia, where a larger share of supply is locked into long-term contracts, Europe relies more heavily on spot markets, leaving it exposed to sharp price swings.

China relies on Iran for about 13% of its petroleum needs. With another 5% sourced from Venezuela, China finds a significant fraction of its supplies at risk. Electric vehicles make up over half of new car sales in China, but oil is critical to a range of other industries. Reduced supplies from Iran could make it difficult for China to sustain targeted rates of economic growth.

Japan is also exposed to near-term stagflation risks if energy prices surge while wage growth lags. This would be an especially uncomfortable mix for an economy that has only recently re-engaged with inflation. Economic activity and financial markets have shown admirable resilience amid the maelstrom of policy uncertainty over the past year. The most recent economic outlook from the International Monetary Fund characterized the global economy as being "Steady Amid Divergent Forces." But the situation in the Middle East is very serious, and it will present challenges for individuals, firms, and portfolios.