A recent US-Israeli joint attack on Iran, ostensibly to neutralize nuclear and military threats, has escalated into a regional conflict with significant, far-reaching implications for the global economy, primarily due to disruptions in vital shipping lanes and energy markets.
Mind Map
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Hey everyone, it's Richard. You're
watching The Plain Bagel. Following
months of growing tensions and years of
strikes being exchanged, the US and
Israel carried out a joint attack on
Iran this past Saturday, dubbed
Operation Epic Fury. Uh the stated goal
of the attack was to eliminate the
imminent nuclear threat posed by the
Iranian regime, destroy its ballistic
missile arsenal, degrade its proxy
terror networks, and its navy
forces. However, with the strikes also
killing the country's supreme leader
Ayata Ali Kam and Trump calling on the
people of Iran to overthrow their
government, despite Pete Hegsth pointing
otherwise, it seems pretty clear that
the intent here is a complete regime
change for the country. And while the
initial attack from the US was very
swift, the conflict has very quickly
escalated throughout the region. with
Iran launching a number of attacks
against neighboring countries,
particularly ones hosting US troops, and
Trump suggesting the military operation
could last four to six weeks. Now, in
addition to debates over the attacks,
with many weighing the oppressive and
deadly force that Iranian regime has
been in the region with the civilian
casualties we've already seen caused by
the US strikes and the general unstable
nature of the region. One of the stories
we've seen many outlets covering with
this update is how disruptive this
conflict might end up being for the
global economy, which naturally in the
face of the horrors of war is not a key
priority here. But there is expected to
be a fairly far-reaching implication
from the conflict that we're seeing,
which might be surprising for some. Iran
is, after all, a fairly isolated
country. It was up until 2022 the most
heavily sanctioned country in the world
until it was replaced by Russia
following the invasion of Ukraine. And
the country has long operated as a bit
of a hermit in the region. So most would
probably anticipate pretty limited
economic fallout from a war in the
country. But that's actually far from
the case. So today we'll go over the
risks the conflict in Iran poses to the
global economy and why economists are
bracing for pretty farreaching impact
here. Uh not to make light of the other
more horrific aspects to this
development, but as an economics and
finance channel, I think it's worth
diving into the implications here and
why people who are even far removed from
the region might see an impact. Now,
Iran, as mentioned, is a fairly
economically isolated country uh thanks
to the slew of sanctions it faces from
developed nations. The country, an
authoritarian theocracy, was first
designated a state sponsor of acts of
international terrorism by the US back
in 1984 with the country being a key
backer of groups like Hamas and
Hezbollah. And while the country did
sign a deal, the joint comprehensive
plan of action or simply the Iran
nuclear deal for short, back in 2015 to
have some sanctions lifted in exchange
for the reigning in of its nuclear
development programs. The US itself
pulled out of the deal in 2018 while the
United Nations found Iran in
non-compliance back in 2025, leading to
the reimposition of restrictions with
there long being concerns that Iran is
secretly developing nuclear weapons.
Now, while the UN has focused on more
targeted sanctions, freezing assets for
certain individuals and organizations,
and restricting nuclear and weapons
development, the US has been more broad
with its restrictions, forbidding nearly
all trade, financial transactions, and
investments in the region beyond actions
authorized directly by the government
with humanitarian exceptions only
granted for a select few products like
food and medicine. This, combined with
Iran's reliance on oil, has made the
country's economy fairly volatile.
Despite Iran having double the
population of Canada, for example, its
economy is roughly 1/5if Canada's size
when measured in gross domestic product,
with exports likewise being a fifth of
Canada's own. Nonetheless, Iran has
remained a key supplier in the very
important market of energy, in
particular, crude oil. Uh you see Iran
actually produces about 4% of the
world's oil with the country hosting the
third largest oil reserve in the world
making up about 12% of global reserves.
And while some of the sanctions against
Iran restrict the country's ability to
sell this oil, the country has been able
to continue shipping the product thanks
to sophisticated black market channels
it's developed over time. With the
country sending the vast majority of its
oil exports, over 80% to China, making
it the second largest source of crude
for the country with an estimated 520
million barrels being sent to China in
2025. Because of this, any conflict with
Iran has historically translated into a
jump in oil prices on the expectation of
supply tightening up. And this
circumstance is no different. In fact,
with the attack from the US and Israel,
we've seen the West Texas Intermediate
reach nearly $90 a barrel, up over 30%
over the span of a week, while the Brent
crude index has risen 25% to $91 a
barrel. But it's not actually the impact
to Iran's own oil sales that's primarily
contributing to surging prices here.
While that certainly plays a role, most
people have been pointing to another
more far-reaching variable here, the
straight of Hormuz. You see, the street
of Hormuz is a vital waterway that
connects the Persian Gulf to the Gulf of
Oman. It's where many of the world's
largest oil producers, including Saudi
Arabia, the United Arab Emirates, and
Iran itself, send out their oil to
international markets. In fact, about
31% of all seaborn crude and about 1/5if
of global crude oil passes through the
strait on a daily basis. So, you can see
how important the waterway is to global
oil markets. and Iran happens to border
the straight on the northern side,
including the passageways most narrow
choke point at just 33 kilometers wide.
So, there's long been this concern that
Iran could cut off the world from about
a fifth of its total oil supply. And on
Monday, we saw that risk become reality
when the Islamic Revolution Guard Corp
announced that they would be closing the
straight, warning that it would set any
vessel attempting to pass through
ablaze. with eight vessels having
already been struck in the straight and
a number of shipping companies
suspending all vessel transit and
anchoring ships to avoid attacks,
effectively killing transit in the
channel and leaving hundreds of ships
stranded. So, right away you can see why
some are forecasting a pretty meaningful
economic impact from the conflict in
Iran. Uh while it's true that about 84%
of the crude oil and condensate that
comes from the strait is sent to Asian
countries including China, India, Japan,
and South Korea, oil prices will likely
rise globally if the closure is
maintained as these countries turn to
other markets for their supply with a
Kona a senior portfolio manager with
Newberger Burman warning that a
disruption lasting over a month could
send prices well into the triple digits,
something we haven't seen since 2022. As
you might be aware, oil has a fairly
broad impact on global economic
activity. Uh oil is used for everything
from electricity generation and fuel to
the production of a slew of end products
and compounds. So beyond the direct
impact we can see on things like
gasoline prices, any increase in oil's
price tends to reverberate across a slew
of production chains. Not to mention
that as fuels become more expensive, it
becomes more expensive to ship and
transport goods. uh so even products not
directly derived from petroleum could
still see a meaningful price impact. Now
importantly we have to mention that
there are alternatives to the street of
Hormuz for transporting Middle Eastern
oil to international markets. As you can
expect the closure of the street has
long existed as a threat to the region
given Iran's history and instability. So
nations have put effort into developing
alternative export routes. Saudi Arabia,
for example, has pipeline capacity for 5
million barrels per day that can reach
the Red Sea, with this covering most of
the oil the country exported through the
strait in February, while the UAE has
infrastructure that reaches the Gulf of
Oman directly. So, it's unlikely we
truly see 20% of the world's oil supply
just disappear here. However, with the
Red Sea, there's risk there as well,
given that we've seen Houthi rebels
based in Yemen strike freight vessels in
the past, with that group notably being
backed by Iran. The current conflict has
seen some critical infrastructure
damaged in the region, including
refineries, oil storage, a fuel tank
terminal, and Oman's port of Duke with
Ryside Energy estimating that even with
these alternatives available, we could
still see crude oil supply drop by 8 to
10 million barrels per day, equivalent
to nearly 10% of global supply. So,
there's still likely to be a very
meaningful impact. And even beyond oil,
there are a number of other disruptions
that pose threats for the global
economy. Uh the straight is also a key
passageway for liqufied natural gas
which itself is used for heating,
electricity and generally as a fuel. Uh
so disruptions to that commodity will
likewise translate into similar impacts
with natural gas futures prices having
already jumped over 60% in European
markets. We also see about a third of
the world's ura a key nitrogen-based
fertilizer flow through the passageway.
So this could also have a direct impact
on food prices with that commodity
having seen its price jump 25% since the
initial attack. The conflict has also
disrupted air travel with flights being
cancelled amid airspace closures in the
Middle East and marine insurance
companies have already sought to cancel
coverage for war risks related to Iran.
An issue likewise faced by airline
companies which are now experiencing a
gap in their coverage. Something that's
likely to discourage companies from
operating in the region if they can't
get protection from these catastrophic
risks. With tanker prices already
jumping internationally on the
disruption in the region. And when we
look to neighboring countries in the
region, we of course can expect much
more acute pressures. Many of the Gulf
countries have nationalized their oil
production, meaning that any impact to
their ability to export oil directly
decreases government revenue, which
naturally has broad-reaching impacts for
the country as a whole. On top of this,
war in general tends to contribute to
capital flight, weaker economic
activity, and higher inflation for
nearby countries. And as risks for
operating in a region increase, it's
more likely to discourage that economic
activity. This is especially true for
industries like tourism, which some Gulf
countries are fairly reliant on. The
UAE, for example, derives 14% of its GDP
from the industry. And then there's, of
course, the more direct risk of capital
impairment. A risk again we're already
seeing play out to an extent with Saudi
Aramco, for example, Saudi Arabia's
state-run oil producer and the largest
oil company in the world, having itself
been targeted by drone strikes, albeit
with seemingly no damage to its
infrastructure. So from the acute impact
to the region to the more far-stretching
inflation implications and trade
disruptions, a war in the region is
likely to be highly disruptive to the
global economy, even with Iran's
isolation. And if the conflict stretches
longer than anticipated, these impacts
could naturally be quite meaningful.
Using the Keel Institute's price of war
calculator, for example, which uses 2023
data and assumes an average war that
lasts 3.5 years, we can see that a war
in Iran could cost the country nearly $1
trillion in lost capital, nearly $600
billion in lost GDP, and cause the
economy to contract over 30%. All over a
5-year period, while other countries
could cumulatively see a GDP loss of
over $1 trillion. Now, importantly,
that's a very crude estimate that
assumes things escalate far beyond what
we're currently seeing. But given the
history of Middle Eastern conflicts
stretching well beyond their initial
scope, it is a risk that's faced here.
Now, when it comes to the impact on the
US specifically, there's long been this
view that war is actually good for
business, as evil as that sounds. Uh,
namely because the government tends to
increase spending during geopolitical
conflicts and because the US is very far
removed from the devastation of these
types of engagements. Some hold the view
that economic activity thrives during
wars and certainly we have seen periods
in history of GDP growing strongly
during major conflicts and certain
players will benefit from the current
war. However, even with America's
privileged position, there's still some
meaningful negative consequences to its
economy from these types of engagements.
For one, US inflation tends to spike
during geopolitical conflicts in part
from this higher government spending.
something that will obviously be more
pronounced here given the impact on the
oil market and the broad disruptions to
trade uh with freight rates likely to
surge and trade volumes likely to
decrease. This may also lead to an
increase in interest rates. The Federal
Reserve is still grappling with the
impacts of tariffs on price levels and
may have to switch to hiking rates
should we see a new inflation risk. And
while US Treasury bond yields tend to
decrease during geopolitical conflicts
as investors buy the asset as a safe
haven investment to protect their money,
we've so far actually seen yields
increase slightly with fears over
inflation seemingly offsetting this
factor. Finally, we tend to see US debt
increase during wars again because of
that heightened spending, which could
prove problematic given the pressure on
interest rates and the lost tariff
revenue the White House experienced last
month from the Supreme Court's ruling
that Trump's AIPA tariffs were illegal.
I also won't spend a tremendous amount
of time on stocks given the nature of
the situation. But it is worth noting
that while certain sectors of course
experience a range of impacts during
geopolitical conflicts in the short
term, US stock market valuations in
general haven't historically exhibited a
direct relationship with geopolitical
conflicts over the long term according
to the Institute of Economics and Peace.
And while stocks do tend to experience a
sell-off in the short term, returns tend
to normalize thereafter with performance
often dominated by other variables. All
to say, it's not usually wise to trade
off of short-term geopolitical headlines
if you're investing for the long term,
especially given that we just don't know
how things will ultimately settle. But
that's the economic situation with Iran
as it's currently been assessed. Given
that this is a developing story,
obviously many factors are going to be
changing here. The US, for example, has
already highlighted that it will provide
insurance and escort ships through the
Gulf to combat Iran's closure of the
strait. So, while that likely won't
offset the full impact, that is
certainly something that could lessen
the blow. And we could see other factors
depress oil prices from here. OPEC plus,
for example, the Organization of
Petroleum Exporting Countries, plus
other group participants, recently opted
to raise oil production by over 200,000
barrels per day and could easily push
this level higher should pressure on
supply continue. So, while the group
includes many of the Gulf countries
impacted by the war here, some other
nations may be able to bolster supply
amid the conflict. We also, of course,
have no concept of how long this
conflict might last. We could see other
countries pulled into this like Russia
and China who is an important lifeline
for Iran. Alway countries while
denouncing the attacks have so far
avoided intervening. But if history is
any precedent, it's likely we do see
things stretch out for some time. And
even if the Iranian regime is taken
down, there's the risk of a power vacuum
forming and other violent groups taking
control. So 4 to 5e frame does seem
fairly optimistic. Nonetheless, we'll
just have to wait and see how things
develop from here. Uh thanks for
watching. I hope you found this video
helpful. If you did, please do make sure
to like, subscribe, all that good stuff.
It does help the channel tremendously.
And if you're interested in learning
more about how war generally impacts
economic activity, I'll link to a video
that I put out last year on that topic
that you can check out. Thanks again for
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