Global Economic Impact Intensifies Amid Ongoing Conflict in Iran

The ongoing conflict in Iran has led to significant disruptions in global energy supplies, causing oil prices to surge and raising concerns about potential stagflation and economic recessions worldwide.

Attacks on key energy infrastructures, including Persian Gulf refineries, pipelines, and gas fields, have resulted in prolonged economic challenges. Christopher Knittel, an energy economist at the Massachusetts Institute of Technology, noted that the destruction of infrastructure means the ramifications of this war are going to be long-lived.

Iran's strike on Qatar's Ras Laffan natural gas terminal on March 18 eliminated 17% of Qatar's LNG export capacity, with repairs expected to take up to five years, according to state-owned QatarEnergy. Additionally, Iran's actions have effectively closed off the Strait of Hormuz, a critical transit point for a fifth of the world's oil, leading to the largest supply disruption in the history of the global oil market, as reported by the International Energy Agency.

Oil prices have responded sharply, with Brent crude oil rising 3.4% to settle at $105.32 per barrel, up from approximately $70 before the conflict began. Benchmark U.S. crude increased by 5.5% to $99.64 per barrel. Historically, oil price shocks like this have led to global recessions, Knittel observed.

The conflict has also revived concerns about stagflation, reminiscent of the 1970s oil shocks. Carmen Reinhart of the Harvard Kennedy School highlighted the increased risk of higher inflation and lower growth. Gita Gopinath, former chief economist at the International Monetary Fund, projected that global economic growth could be 0.3 to 0.4 percentage points lower if oil prices average $85 a barrel in 2026.

Fertilizer shortages and price hikes are impacting agriculture, with the Persian Gulf accounting for a significant share of urea and ammonia exports. The blockade of the Strait of Hormuz has led to urea prices increasing by 50% and ammonia by 20%. Countries like Brazil, which imports 85% of its fertilizer, are particularly vulnerable. Higher fertilizer prices are likely to make food more expensive and less abundant as farmers reduce usage, leading to lower yields.

The conflict has also disrupted global helium supplies, a byproduct of natural gas essential for chipmaking, rockets, and medical imaging. Qatar, supplying a third of the world's helium, has been affected by the damage to the Ras Laffan facility.

International Energy Agency head Fatih Birol stated that no country will be immune to the effects of this crisis if it continues. Poorer countries are expected to be hit hardest, facing significant energy shortages as they are outbid for remaining oil and natural gas supplies, according to Lutz Kilian of the Federal Reserve Bank of Dallas.

Asian countries are particularly exposed, with over 80% of the oil and LNG passing through the Strait of Hormuz destined for the region. In response, the Philippines has reduced government office operations to four days a week and limited air conditioning use. Thailand has instructed public workers to use stairs instead of elevators. India, the world's second-largest importer of liquefied petroleum gas, is prioritizing household needs over businesses, leading to some eateries shortening hours or closing temporarily.

South Korea, heavily dependent on energy imports, is restricting car use by public employees and has reinstated fuel price caps. In the United States, higher gasoline prices are affecting consumers already burdened by the high cost of living. The average price of a gallon of gasoline has risen to nearly $4 from $2.98 a month ago, according to AAA. Mark Zandi, chief economist at Moody's Analytics, noted that nothing weighs more heavily on consumers' collective psyche than having to pay more at the pump.

The U.S. economy, already showing signs of weakness, expanded at an annual pace of just 0.7% from October through December, down from 4.4% in the previous quarter. Employers unexpectedly cut 92,000 jobs in February, with monthly additions averaging just 9,700 in 2025, the weakest hiring outside a recession since 2002. Gregory Daco, chief economist at EY-Parthenon, has raised the odds of a U.S. recession over the next year to 40%, up from the normal risk of 15%.

The global economy has demonstrated resilience amid recent shocks, including the pandemic and Russia's invasion of Ukraine. However, optimism is fading as threats to the Gulf's energy infrastructure persist. Lutz Kilian emphasized that some of the damage to LNG facilities in Qatar will likely take years to repair, and the process of recovery will be slow even under the best circumstances. Mark Zandi and his colleagues concluded that there is no economic upside to the conflict with Iran, and the key questions now are how much longer the hostilities will continue and how much economic damage they will cause.