How the US–Israel–Iran Conflict Is Reshaping the Global Economy
Ali Hassan
Islamabad: The ongoing US–Israel–Iran conflict is no longer just a regional military confrontation, it has evolved into a systemic shock with far-reaching implications for the global economy, trade architecture, and geopolitical stability.
What began as a rapid escalation of hostilities has now entered a prolonged phase in which economic disruption, rather than territorial gain, appears to be one of the most consequential outcomes.
On February 28, 2026, the conflict escalated dramatically when the United States and Israel launched a large-scale military offensive described by the Pentagon as exceeding the intensity of the “shock and awe” campaign used in Iraq in 2003.
By the following morning, Iran’s Supreme Leader Ali Khamenei had been killed, and within hours, Iran responded with widespread missile strikes targeting Israel and US bases across the Gulf region.
Critically, the escalation extended beyond traditional battlefields. The Strait of Hormuz—a vital maritime corridor responsible for roughly one-fifth of global oil flows, became effectively non-operational.
This development transformed the conflict from a localized war into a disruption of global energy logistics.
The First Shock Absorber
The immediate and most visible impact of the conflict has been in global energy markets. Brent crude prices surged sharply from approximately $70 per barrel to over $113 within weeks, reflecting both supply constraints and heightened geopolitical risk premiums.
The International Energy Agency (IEA) has characterized the situation as one of the most significant supply disruptions in oil market history. With millions of barrels per day affected, the global energy system has entered a state of constrained flow rather than normal distribution.
The disruption has also extended to natural gas.
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Qatar, a major global LNG supplier, declared force majeure following damage to key infrastructure. Given that Qatar accounts for roughly 20 percent of global liquefied natural gas supply, the implications for energy security, particularly in Asia and Europe, are substantial.
Financial institutions and energy analysts have begun modeling extreme scenarios, including sustained oil prices reaching $200 per barrel if supply routes remain restricted.
Such projections reflect not only physical shortages but also risk-adjusted pricing under conditions of prolonged instability.
From Oil to Inflation
The economic consequences of an oil shock propagate through multiple channels. Rising crude prices increase the cost of fertilisers, which in turn affects agricultural output and global food prices.
Freight and logistics costs rise as shipping fuel becomes more expensive, while aviation faces increased operational costs at a time when the sector is still recovering from previous disruptions.
Industries heavily dependent on energy inputs, such as petrochemicals, steel, aluminium, and cement, are particularly exposed. These sectors face margin compression, which is likely to be passed along the supply chain to consumers.
Historically, such conditions have been associated with inflationary pressure and, in severe cases, global recessions.
As noted by energy economist Christopher Knittel of MIT, large-scale oil price shocks have consistently preceded economic downturns due to their broad-based impact on production costs and consumer demand.
A Structural Shift
While previous oil crises, such as those in 1973 or 1979, were significant, the current situation differs in its structural nature. Earlier disruptions primarily affected supply flows or pricing mechanisms. In contrast, the present conflict involves physical destruction of infrastructure and active contestation of critical trade routes.
The continued instability of the Strait of Hormuz represents not just a supply bottleneck but a systemic vulnerability in global trade architecture.
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Unlike policy-driven sanctions, physical damage to infrastructure, such as LNG facilities, requires years of reconstruction, suggesting that the economic impact will persist long after active hostilities subside.
This distinction is crucial: the current shock is not merely cyclical but structural, with the potential to reshape energy markets and trade routes over the long term.
Economic Externalization
From a strategic standpoint, Iran’s response appears to reflect an asymmetric approach to conflict. Unable to match US and Israeli conventional military capabilities, Iran has reportedly focused on increasing the economic and logistical costs of the war for the broader international system.
By targeting infrastructure across Gulf states, including energy facilities, desalination plants, and military installations, Iran is effectively extending the battlefield into domains that directly affect global commerce and civilian populations.
This approach places pressure not only on adversaries but also on neutral and indirectly affected economies.
The Gulf Cooperation Council’s economic model—built on energy exports, logistics hubs, and global connectivity, is now under strain. Insurance premiums for maritime transport have increased significantly, and shipping routes through the region have become economically unviable for many operators.
As a result, commercial shipping activity has declined in the affected corridors, further tightening global supply chains.
Global Spillover Effects
The impact of the conflict is disproportionately affecting countries far from the battlefield, highlighting the interconnected nature of the modern global economy.
Energy-importing nations such as Japan and South Korea, which rely heavily on Middle Eastern crude, have implemented emergency measures reminiscent of past oil crises.
India is managing the fiscal burden of subsidising energy costs to protect vulnerable populations. Southeast Asian economies are adjusting work patterns and energy consumption to cope with shortages.
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In regions already facing economic fragility, such as Egypt and Pakistan, the conflict is exacerbating inflationary pressures and currency instability.
Pakistan, despite hosting diplomatic discussions, faces additional macroeconomic stress as it attempts to maintain currency stability amid rising import costs and capital constraints.
These developments underscore a key reality: in a globally integrated system, disruptions in one region propagate rapidly across distant economies through trade, energy, and financial linkages.
Missed Diplomatic Window
An important contextual factor in assessing the current crisis is the proximity of a potential diplomatic breakthrough prior to the escalation.
On February 27, Oman’s foreign minister indicated that Iran had agreed to key conditions in nuclear negotiations, including limitations on uranium stockpiling and enhanced international verification mechanisms. Talks were scheduled to resume shortly thereafter.
The subsequent military escalation effectively halted these negotiations, redirecting the trajectory from diplomacy to conflict.
This sequence of events is significant in understanding the timing and escalation dynamics of the war, as well as the opportunity costs associated with the breakdown of negotiations.
Long-Term Outlook
International financial and policy institutions are now actively monitoring the situation. Organizations such as the World Economic Forum, the International Monetary Fund, the World Bank, and the International Energy Agency have identified the conflict as a structural shock with implications for commodity markets, inflation, supply chains, and geopolitical alignments.
Emergency consultations among G7 finance ministers and central banks indicate growing concern about systemic risks to the global economy.
The primary channels of concern include sustained energy price volatility, inflationary pressure, potential recessionary conditions, and fragmentation of global trade networks.
A Connected World Under Stress
The conflict between the United States, Israel, and Iran demonstrates the extent to which modern economies are interdependent.
A disruption in a geographically limited region has produced widespread consequences affecting energy markets, food systems, industrial production, and financial stability across continents.
The Strait of Hormuz, though geographically distant from most global populations, sits at the center of a network that underpins much of the world’s economic activity.
Its instability has revealed a fundamental vulnerability in the global system: that critical chokepoints, when disrupted, can transmit shockwaves far beyond their immediate vicinity.
In this context, distance offers little insulation.
The economic effects of the conflict are not confined to the region, they are global, systemic, and likely to persist.
Ali Hassan is an International Relations student at the International Islamic University, with a strong interest in global political economy, politics, and social issues.
The article is the writer’s opinion, it may or may not adhere to the organization’s editorial policy.
