0:01 Hey everyone, it's Richard. You're
0:02 watching The Plain Bagel. Following
0:05 months of growing tensions and years of
0:07 strikes being exchanged, the US and
0:10 Israel carried out a joint attack on
0:12 Iran this past Saturday, dubbed
0:14 Operation Epic Fury. Uh the stated goal
0:16 of the attack was to eliminate the
0:18 imminent nuclear threat posed by the
0:20 Iranian regime, destroy its ballistic
0:22 missile arsenal, degrade its proxy
0:24 terror networks, and its navy
0:26 forces. However, with the strikes also
0:27 killing the country's supreme leader
0:30 Ayata Ali Kam and Trump calling on the
0:32 people of Iran to overthrow their
0:34 government, despite Pete Hegsth pointing
0:36 otherwise, it seems pretty clear that
0:38 the intent here is a complete regime
0:40 change for the country. And while the
0:41 initial attack from the US was very
0:43 swift, the conflict has very quickly
0:44 escalated throughout the region. with
0:46 Iran launching a number of attacks
0:48 against neighboring countries,
0:50 particularly ones hosting US troops, and
0:52 Trump suggesting the military operation
0:54 could last four to six weeks. Now, in
0:56 addition to debates over the attacks,
0:58 with many weighing the oppressive and
1:00 deadly force that Iranian regime has
1:02 been in the region with the civilian
1:03 casualties we've already seen caused by
1:06 the US strikes and the general unstable
1:07 nature of the region. One of the stories
1:09 we've seen many outlets covering with
1:11 this update is how disruptive this
1:13 conflict might end up being for the
1:15 global economy, which naturally in the
1:18 face of the horrors of war is not a key
1:21 priority here. But there is expected to
1:24 be a fairly far-reaching implication
1:26 from the conflict that we're seeing,
1:28 which might be surprising for some. Iran
1:30 is, after all, a fairly isolated
1:33 country. It was up until 2022 the most
1:35 heavily sanctioned country in the world
1:37 until it was replaced by Russia
1:39 following the invasion of Ukraine. And
1:41 the country has long operated as a bit
1:43 of a hermit in the region. So most would
1:45 probably anticipate pretty limited
1:48 economic fallout from a war in the
1:50 country. But that's actually far from
1:52 the case. So today we'll go over the
1:54 risks the conflict in Iran poses to the
1:56 global economy and why economists are
1:59 bracing for pretty farreaching impact
2:01 here. Uh not to make light of the other
2:03 more horrific aspects to this
2:04 development, but as an economics and
2:05 finance channel, I think it's worth
2:07 diving into the implications here and
2:10 why people who are even far removed from
2:12 the region might see an impact. Now,
2:14 Iran, as mentioned, is a fairly
2:16 economically isolated country uh thanks
2:18 to the slew of sanctions it faces from
2:20 developed nations. The country, an
2:22 authoritarian theocracy, was first
2:25 designated a state sponsor of acts of
2:27 international terrorism by the US back
2:29 in 1984 with the country being a key
2:31 backer of groups like Hamas and
2:33 Hezbollah. And while the country did
2:34 sign a deal, the joint comprehensive
2:37 plan of action or simply the Iran
2:39 nuclear deal for short, back in 2015 to
2:41 have some sanctions lifted in exchange
2:43 for the reigning in of its nuclear
2:45 development programs. The US itself
2:47 pulled out of the deal in 2018 while the
2:49 United Nations found Iran in
2:51 non-compliance back in 2025, leading to
2:54 the reimposition of restrictions with
2:55 there long being concerns that Iran is
2:57 secretly developing nuclear weapons.
2:59 Now, while the UN has focused on more
3:01 targeted sanctions, freezing assets for
3:03 certain individuals and organizations,
3:05 and restricting nuclear and weapons
3:07 development, the US has been more broad
3:09 with its restrictions, forbidding nearly
3:11 all trade, financial transactions, and
3:13 investments in the region beyond actions
3:15 authorized directly by the government
3:16 with humanitarian exceptions only
3:19 granted for a select few products like
3:21 food and medicine. This, combined with
3:23 Iran's reliance on oil, has made the
3:25 country's economy fairly volatile.
3:26 Despite Iran having double the
3:28 population of Canada, for example, its
3:32 economy is roughly 1/5if Canada's size
3:33 when measured in gross domestic product,
3:35 with exports likewise being a fifth of
3:38 Canada's own. Nonetheless, Iran has
3:40 remained a key supplier in the very
3:42 important market of energy, in
3:44 particular, crude oil. Uh you see Iran
3:47 actually produces about 4% of the
3:49 world's oil with the country hosting the
3:51 third largest oil reserve in the world
3:54 making up about 12% of global reserves.
3:56 And while some of the sanctions against
3:58 Iran restrict the country's ability to
3:59 sell this oil, the country has been able
4:01 to continue shipping the product thanks
4:03 to sophisticated black market channels
4:05 it's developed over time. With the
4:07 country sending the vast majority of its
4:10 oil exports, over 80% to China, making
4:11 it the second largest source of crude
4:14 for the country with an estimated 520
4:16 million barrels being sent to China in
4:18 2025. Because of this, any conflict with
4:21 Iran has historically translated into a
4:23 jump in oil prices on the expectation of
4:25 supply tightening up. And this
4:27 circumstance is no different. In fact,
4:29 with the attack from the US and Israel,
4:31 we've seen the West Texas Intermediate
4:35 reach nearly $90 a barrel, up over 30%
4:37 over the span of a week, while the Brent
4:41 crude index has risen 25% to $91 a
4:43 barrel. But it's not actually the impact
4:46 to Iran's own oil sales that's primarily
4:48 contributing to surging prices here.
4:49 While that certainly plays a role, most
4:51 people have been pointing to another
4:54 more far-reaching variable here, the
4:56 straight of Hormuz. You see, the street
4:58 of Hormuz is a vital waterway that
5:00 connects the Persian Gulf to the Gulf of
5:02 Oman. It's where many of the world's
5:04 largest oil producers, including Saudi
5:07 Arabia, the United Arab Emirates, and
5:10 Iran itself, send out their oil to
5:12 international markets. In fact, about
5:16 31% of all seaborn crude and about 1/5if
5:18 of global crude oil passes through the
5:20 strait on a daily basis. So, you can see
5:22 how important the waterway is to global
5:25 oil markets. and Iran happens to border
5:27 the straight on the northern side,
5:29 including the passageways most narrow
5:32 choke point at just 33 kilometers wide.
5:34 So, there's long been this concern that
5:36 Iran could cut off the world from about
5:40 a fifth of its total oil supply. And on
5:43 Monday, we saw that risk become reality
5:45 when the Islamic Revolution Guard Corp
5:47 announced that they would be closing the
5:49 straight, warning that it would set any
5:51 vessel attempting to pass through
5:52 ablaze. with eight vessels having
5:54 already been struck in the straight and
5:56 a number of shipping companies
5:58 suspending all vessel transit and
6:00 anchoring ships to avoid attacks,
6:02 effectively killing transit in the
6:04 channel and leaving hundreds of ships
6:06 stranded. So, right away you can see why
6:08 some are forecasting a pretty meaningful
6:10 economic impact from the conflict in
6:13 Iran. Uh while it's true that about 84%
6:15 of the crude oil and condensate that
6:17 comes from the strait is sent to Asian
6:20 countries including China, India, Japan,
6:22 and South Korea, oil prices will likely
6:24 rise globally if the closure is
6:26 maintained as these countries turn to
6:28 other markets for their supply with a
6:30 Kona a senior portfolio manager with
6:32 Newberger Burman warning that a
6:34 disruption lasting over a month could
6:36 send prices well into the triple digits,
6:39 something we haven't seen since 2022. As
6:41 you might be aware, oil has a fairly
6:43 broad impact on global economic
6:45 activity. Uh oil is used for everything
6:47 from electricity generation and fuel to
6:50 the production of a slew of end products
6:52 and compounds. So beyond the direct
6:53 impact we can see on things like
6:55 gasoline prices, any increase in oil's
6:58 price tends to reverberate across a slew
6:59 of production chains. Not to mention
7:01 that as fuels become more expensive, it
7:03 becomes more expensive to ship and
7:05 transport goods. uh so even products not
7:08 directly derived from petroleum could
7:11 still see a meaningful price impact. Now
7:12 importantly we have to mention that
7:14 there are alternatives to the street of
7:16 Hormuz for transporting Middle Eastern
7:18 oil to international markets. As you can
7:20 expect the closure of the street has
7:22 long existed as a threat to the region
7:24 given Iran's history and instability. So
7:26 nations have put effort into developing
7:28 alternative export routes. Saudi Arabia,
7:31 for example, has pipeline capacity for 5
7:33 million barrels per day that can reach
7:35 the Red Sea, with this covering most of
7:37 the oil the country exported through the
7:39 strait in February, while the UAE has
7:41 infrastructure that reaches the Gulf of
7:43 Oman directly. So, it's unlikely we
7:46 truly see 20% of the world's oil supply
7:48 just disappear here. However, with the
7:50 Red Sea, there's risk there as well,
7:51 given that we've seen Houthi rebels
7:54 based in Yemen strike freight vessels in
7:55 the past, with that group notably being
7:57 backed by Iran. The current conflict has
7:59 seen some critical infrastructure
8:00 damaged in the region, including
8:03 refineries, oil storage, a fuel tank
8:05 terminal, and Oman's port of Duke with
8:07 Ryside Energy estimating that even with
8:09 these alternatives available, we could
8:12 still see crude oil supply drop by 8 to
8:14 10 million barrels per day, equivalent
8:17 to nearly 10% of global supply. So,
8:19 there's still likely to be a very
8:21 meaningful impact. And even beyond oil,
8:23 there are a number of other disruptions
8:24 that pose threats for the global
8:26 economy. Uh the straight is also a key
8:28 passageway for liqufied natural gas
8:30 which itself is used for heating,
8:32 electricity and generally as a fuel. Uh
8:34 so disruptions to that commodity will
8:36 likewise translate into similar impacts
8:38 with natural gas futures prices having
8:41 already jumped over 60% in European
8:43 markets. We also see about a third of
8:45 the world's ura a key nitrogen-based
8:47 fertilizer flow through the passageway.
8:48 So this could also have a direct impact
8:50 on food prices with that commodity
8:54 having seen its price jump 25% since the
8:55 initial attack. The conflict has also
8:57 disrupted air travel with flights being
8:59 cancelled amid airspace closures in the
9:01 Middle East and marine insurance
9:02 companies have already sought to cancel
9:05 coverage for war risks related to Iran.
9:07 An issue likewise faced by airline
9:09 companies which are now experiencing a
9:10 gap in their coverage. Something that's
9:11 likely to discourage companies from
9:13 operating in the region if they can't
9:15 get protection from these catastrophic
9:17 risks. With tanker prices already
9:18 jumping internationally on the
9:20 disruption in the region. And when we
9:21 look to neighboring countries in the
9:23 region, we of course can expect much
9:25 more acute pressures. Many of the Gulf
9:27 countries have nationalized their oil
9:28 production, meaning that any impact to
9:31 their ability to export oil directly
9:33 decreases government revenue, which
9:34 naturally has broad-reaching impacts for
9:36 the country as a whole. On top of this,
9:38 war in general tends to contribute to
9:39 capital flight, weaker economic
9:42 activity, and higher inflation for
9:44 nearby countries. And as risks for
9:46 operating in a region increase, it's
9:48 more likely to discourage that economic
9:49 activity. This is especially true for
9:51 industries like tourism, which some Gulf
9:53 countries are fairly reliant on. The
9:56 UAE, for example, derives 14% of its GDP
9:58 from the industry. And then there's, of
10:00 course, the more direct risk of capital
10:02 impairment. A risk again we're already
10:04 seeing play out to an extent with Saudi
10:06 Aramco, for example, Saudi Arabia's
10:08 state-run oil producer and the largest
10:10 oil company in the world, having itself
10:13 been targeted by drone strikes, albeit
10:14 with seemingly no damage to its
10:16 infrastructure. So from the acute impact
10:19 to the region to the more far-stretching
10:21 inflation implications and trade
10:23 disruptions, a war in the region is
10:25 likely to be highly disruptive to the
10:27 global economy, even with Iran's
10:30 isolation. And if the conflict stretches
10:32 longer than anticipated, these impacts
10:34 could naturally be quite meaningful.
10:36 Using the Keel Institute's price of war
10:39 calculator, for example, which uses 2023
10:41 data and assumes an average war that
10:43 lasts 3.5 years, we can see that a war
10:46 in Iran could cost the country nearly $1
10:49 trillion in lost capital, nearly $600
10:52 billion in lost GDP, and cause the
10:55 economy to contract over 30%. All over a
10:57 5-year period, while other countries
11:00 could cumulatively see a GDP loss of
11:02 over $1 trillion. Now, importantly,
11:03 that's a very crude estimate that
11:05 assumes things escalate far beyond what
11:07 we're currently seeing. But given the
11:08 history of Middle Eastern conflicts
11:10 stretching well beyond their initial
11:12 scope, it is a risk that's faced here.
11:13 Now, when it comes to the impact on the
11:15 US specifically, there's long been this
11:17 view that war is actually good for
11:20 business, as evil as that sounds. Uh,
11:22 namely because the government tends to
11:24 increase spending during geopolitical
11:27 conflicts and because the US is very far
11:29 removed from the devastation of these
11:30 types of engagements. Some hold the view
11:32 that economic activity thrives during
11:34 wars and certainly we have seen periods
11:36 in history of GDP growing strongly
11:38 during major conflicts and certain
11:40 players will benefit from the current
11:42 war. However, even with America's
11:43 privileged position, there's still some
11:45 meaningful negative consequences to its
11:47 economy from these types of engagements.
11:49 For one, US inflation tends to spike
11:50 during geopolitical conflicts in part
11:52 from this higher government spending.
11:54 something that will obviously be more
11:55 pronounced here given the impact on the
11:57 oil market and the broad disruptions to
12:00 trade uh with freight rates likely to
12:01 surge and trade volumes likely to
12:03 decrease. This may also lead to an
12:05 increase in interest rates. The Federal
12:06 Reserve is still grappling with the
12:08 impacts of tariffs on price levels and
12:10 may have to switch to hiking rates
12:12 should we see a new inflation risk. And
12:14 while US Treasury bond yields tend to
12:16 decrease during geopolitical conflicts
12:18 as investors buy the asset as a safe
12:20 haven investment to protect their money,
12:22 we've so far actually seen yields
12:24 increase slightly with fears over
12:25 inflation seemingly offsetting this
12:28 factor. Finally, we tend to see US debt
12:29 increase during wars again because of
12:30 that heightened spending, which could
12:32 prove problematic given the pressure on
12:34 interest rates and the lost tariff
12:35 revenue the White House experienced last
12:37 month from the Supreme Court's ruling
12:40 that Trump's AIPA tariffs were illegal.
12:41 I also won't spend a tremendous amount
12:43 of time on stocks given the nature of
12:45 the situation. But it is worth noting
12:47 that while certain sectors of course
12:49 experience a range of impacts during
12:51 geopolitical conflicts in the short
12:53 term, US stock market valuations in
12:55 general haven't historically exhibited a
12:57 direct relationship with geopolitical
12:59 conflicts over the long term according
13:01 to the Institute of Economics and Peace.
13:03 And while stocks do tend to experience a
13:04 sell-off in the short term, returns tend
13:06 to normalize thereafter with performance
13:08 often dominated by other variables. All
13:10 to say, it's not usually wise to trade
13:12 off of short-term geopolitical headlines
13:14 if you're investing for the long term,
13:16 especially given that we just don't know
13:18 how things will ultimately settle. But
13:19 that's the economic situation with Iran
13:21 as it's currently been assessed. Given
13:23 that this is a developing story,
13:25 obviously many factors are going to be
13:26 changing here. The US, for example, has
13:28 already highlighted that it will provide
13:30 insurance and escort ships through the
13:32 Gulf to combat Iran's closure of the
13:33 strait. So, while that likely won't
13:35 offset the full impact, that is
13:36 certainly something that could lessen
13:38 the blow. And we could see other factors
13:40 depress oil prices from here. OPEC plus,
13:42 for example, the Organization of
13:44 Petroleum Exporting Countries, plus
13:46 other group participants, recently opted
13:48 to raise oil production by over 200,000
13:50 barrels per day and could easily push
13:52 this level higher should pressure on
13:54 supply continue. So, while the group
13:55 includes many of the Gulf countries
13:57 impacted by the war here, some other
14:00 nations may be able to bolster supply
14:02 amid the conflict. We also, of course,
14:03 have no concept of how long this
14:05 conflict might last. We could see other
14:06 countries pulled into this like Russia
14:08 and China who is an important lifeline
14:10 for Iran. Alway countries while
14:12 denouncing the attacks have so far
14:13 avoided intervening. But if history is
14:15 any precedent, it's likely we do see
14:17 things stretch out for some time. And
14:18 even if the Iranian regime is taken
14:20 down, there's the risk of a power vacuum
14:22 forming and other violent groups taking
14:25 control. So 4 to 5e frame does seem
14:27 fairly optimistic. Nonetheless, we'll
14:28 just have to wait and see how things
14:30 develop from here. Uh thanks for
14:31 watching. I hope you found this video
14:32 helpful. If you did, please do make sure
14:34 to like, subscribe, all that good stuff.
14:35 It does help the channel tremendously.
14:36 And if you're interested in learning
14:38 more about how war generally impacts
14:40 economic activity, I'll link to a video
14:42 that I put out last year on that topic
14:44 that you can check out. Thanks again for
