The Economic Impact of the War in Iran: Energy Shocks, Supply Chains, and Global Inflation

Wars in major energy-producing regions often mark turning points for the global economy, as their effects quickly spread to energy prices, supply chains, and financial markets. In this context, the recent war in Iran stands out as one of the most consequential geopolitical crises affecting the global economy in recent years. The military escalation in the Gulf region—one of the world’s key arteries for oil and gas supplies—threatens to trigger a new wave of price increases and inflation, not only in the United States but across the global economy.

Shock to Global Energy Markets

The Strait of Hormuz is one of the most critical strategic energy corridors in the world, through which nearly one-fifth of global oil and gas trade passes. With the outbreak of war and the disruption of a significant portion of shipping traffic through the strait, large volumes of energy supplies were effectively removed from global markets, leading to a rapid increase in oil and gas prices.

Although the United States has reached record levels of domestic energy production in recent years, fuel prices remain closely tied to global markets. The growing globalization of energy markets, combined with the expansion of infrastructure designed to export American oil and gas, has made the U.S. economy more sensitive to external supply shocks.

These shocks are reflected directly in gasoline and electricity prices. Crude oil represents a major component of fuel costs, while the U.S. electricity sector relies heavily on natural gas for power generation.

Spillover Effects on Electricity and Energy Prices

Since the United States began exporting liquefied natural gas (LNG) in 2016, domestic gas prices have become increasingly linked to international markets. As a result, any rise in global demand for gas or disruption in supply is quickly transmitted to domestic prices in the United States.

Previous experiences—such as the war in Ukraine in 2022—demonstrated how energy shocks can cause sharp increases in electricity prices within a short period of time. Amid the current escalation, futures prices for LNG in European and Asian markets have already surged significantly, developments that may translate into higher utility bills for households and businesses in the near future.

Food Markets Under Energy Pressure

The consequences of the war are not limited to energy markets; they also extend to global food systems. Fossil fuels play a central role in agricultural production—powering farm machinery, transporting food products, and serving as a key input in fertilizer production.

Estimates suggest that fuel accounts for between 40 and 50 percent of variable crop production costs in some major agricultural economies. Fertilizer production is particularly dependent on natural gas, which can account for as much as 80 percent of total production costs.

This issue is especially significant given the role of Gulf countries—such as Qatar, Saudi Arabia, and the United Arab Emirates—as major global fertilizer producers. A substantial share of global fertilizer trade also passes through the Strait of Hormuz. Consequently, disruptions to these supplies could drive global fertilizer prices higher, eventually feeding into higher food prices and increasing the risk of food insecurity in some regions.

Disruptions to Global Supply Chains

Beyond energy and food, the war’s repercussions may extend to industrial supply chains. Rising fuel prices increase the cost of both maritime and air transportation, while airlines and shipping companies may alter routes to avoid conflict zones, leading to longer transit times and higher logistics costs.

Technology industries may also face disruptions, particularly the semiconductor sector, due to potential shortages of key materials such as helium and bromine used in chip manufacturing. The Gulf region serves as an important transshipment hub for these components, meaning that any disruption to regional trade could have widespread implications for the global technology industry.

Other industries may face similar pressures, including sectors that rely heavily on aluminum imports, as the Gulf region accounts for a significant share of global aluminum production.

Inflationary Pressures on the Global Economy

Economic experience suggests that energy price shocks are among the most significant drivers of inflation. Rising oil prices increase the costs of production, transportation, and energy consumption, which gradually feed into the prices of goods and services across the economy.

Estimates from financial institutions indicate that a 10 percent increase in oil prices could raise overall inflation by roughly 0.3 to 0.4 percentage points within a few months. If elevated prices persist, global inflation may remain higher for longer than previously expected.

In sum, the war in Iran once again highlights the deep interconnectedness of the global economy and its vulnerability to geopolitical crises in key energy regions. Military escalation in the Gulf does not only affect the countries directly involved in the conflict; it also reverberates across energy markets, food systems, and industrial supply chains worldwide.

The longer the conflict persists, the greater the likelihood that it will evolve into a broader economic shock—characterized by rising fuel, energy, and food prices, along with mounting inflationary pressures across global economies. Under these circumstances, the consequences of the war are unlikely to remain confined to the military sphere; rather, they may reshape the global economic landscape in the months ahead.