The Economic Consequences of War with Iran: Lasting Lessons in Energy Resilience
The possibility of a prolonged and destructive conflict between the United States, Israel, and Iran raises critical questions about its potential economic fallout, particularly regarding energy resilience. A war of this scale would have significant effects on fuel prices and overall economic activity, with severe impacts likely felt most acutely in poorer countries. Understanding these consequences hinges on the uncertain trajectory of the conflict and the actions of key players.
Uncertainty in Conflict Resolution
Will the U.S.-Israeli war on Iran conclude soon? This question is central to assessing economic impacts, but it depends on two other factors. First, does the "TACO" principle—"Trump always chickens out"—apply here, or will former President Donald Trump pursue a more aggressive stance? Second, if Trump were to end the war, would Iran or Israel, for whom the struggle is existential, also cease hostilities? If these combatants continue fighting, the carnage in the Gulf region could persist, exacerbating economic disruptions.
A major difficulty lies in deciphering Trump's intentions, which may be unclear even to himself. In recent statements, he suggested the war might end "very soon" but not immediately, while also demanding Iran's "unconditional surrender" and the installation of new leadership. Iran's Islamic Revolutionary Guard Corps has countered, asserting they will determine the war's end and threatening to halt oil exports from the region if attacks continue. The appointment of Mojtaba Khamenei as successor underscores Iran's recalcitrance, indicating a focus on victory rather than surrender, similar to Hamas's resilience after years of Israeli bombardment.
Plausible Outcomes and Economic Scenarios
A cessation of active hostilities appears more plausible than a full peace agreement. The U.S. might halt attacks after inflicting enough damage, or Iran, battered by conflicts, could stop targeting neighbors. Trump might pressure Israel to cease attacks even if the Iranian regime survives, leading to a temporary ceasefire driven by concerns over oil prices. Alternatively, the war could continue at a lower intensity due to depleted Iranian weaponry, potentially allowing some normalcy in shipping through the Strait of Hormuz.
What does this mean for the global economy? The impact largely depends on disruptions to oil and gas shipments and long-term damage to energy facilities. Capital Economics outlines three scenarios:
- Short, Sharp Conflict: Lasting about two weeks, this could result in a loss of approximately 1.4% of global annual oil and LNG exports.
- Three-Month Conflict with Limited Damage: This scenario might lead to a 5-6% reduction in world exports of crude and LNG by 2026.
- Three-Month Conflict with Lasting Damage: If facilities like Iran's Kharg Island are severely impacted, losses could reach 8-9% of global exports, affecting markets into 2027, with oil prices potentially hitting $150 per barrel and EU gas prices soaring to €120 per megawatt hour.
The latter scenario compares to supply shocks from the late 1970s to mid-1980s, highlighting the profound risks to energy resilience and economic stability.
Broader Implications and Lessons
These economic consequences underscore the urgent need for lessons in energy resilience. A war with Iran could trigger widespread volatility, emphasizing the importance of diversifying energy sources and strengthening global supply chains. As nations grapple with potential disruptions, the conflict serves as a stark reminder of how geopolitical tensions can translate into tangible economic hardships, particularly for vulnerable populations in developing countries.
