In the next several blogs we’ll take a closer look behind the consequences of the 2026 Iran War, and the economic fallout that is taking place that does not make headlines. The first volume is a broad look at the course of events that brought us where we are today.
Scope: The war began with American and Israeli air attacks on military targets in Iran itself in an effort to destabilize the ruling government. They destroyed or damaged much of the Iranian’s military capacity in the form of air and naval forces, and attacked known supplies of missiles and drones along with launching structures and manufacturing facilities. Further, a bombing strike killed the Ayatollah Ali Khamenei, Iran’s supreme leader. A major objective was to destroy the remnants of Iran’s nuclear weapons capabilities that survived an earlier strike in June of last year. Iran’s military response included missile strikes on ships in the Persian Gulf, shipping infrastructure of other Gulf states, and U.S. military installations in the area. Their greatest response, however, was to close passage through the Strait of Hormuz that connects the Gulf by sea with the remainder of the world.
Closure of the Strait of Hormuz: By closing the Strait of Hormuz Iran is able to block the distribution of about 20% of the world’s petroleum, and about 25% of the world’s liquid natural gas (LNG) to many needy areas primarily in Europe and Asia. Sulphur as a byproduct of the petroleum refinery process is also in effect being blocked making it more scarce thereby threatening copper smelting needed for industry and AI data warehouses. Fertilizer which is produced using natural gas is becoming much more expensive threatening crop production. Helium used in computer chip production is also becoming more scarce and therefore more expensive at a time when the most advanced computer chips are needed for the rollout of AI infrastructure. The byproduct of this translates into higher prices across the board for not only crude oil itself, but also marine insurance, shipping, storage, and a host of other midstream costs that crude oil goes through until it reaches industrial or retail users.
Impact in Europe: Europe’s situation is acute as it is in the process of converting from Russian oil and gas to LNG, where the costs have soared more than fifteen times. If there is anything fortunate about a war, this one is being fought past the major winter demand for LNG. The situation could be many times more threatening if the winter months were approaching and Europe were to become short of fuel for heat. Along with the rest of the world, Europeans are still subject to soaring fuel prices. Goldman Sachs estimates that the Strait closure could add as much as 1% to euro-area inflation over the course of this year. Inflation predictions that were formerly priced at perhaps a couple of quarter-point interest rate cuts by central banks by the end of the year are now being revised to a couple of quarter-point increases for the same time period. The already above normal inflation rate would continue higher bringing more pressure on European consumers and commercial customers.
Impact in Asia: The situation in Asia is even more acute. In 2025, Asian countries imported about 87% of the crude oil and 86% of the LNG that was produced by Persian Gulf States. China alone imported over eleven million barrels of crude oil per day, but the local stockpiles in China had at the beginning of the closure combined for about one hundred days of further oil consumption and about forty days for LNG. China has a very broad dispersion of petroleum suppliers, however, with Russian being the largest. Japan must import nearly 100% of its total fuel consumption, South Korea about 98%, and they both get the vast majority of it from the Persian Gulf states.
The IEA and its Petroleum Reserves: The International Energy Agency (IEA) maintains a certain amount of oil reserves that can be “made available to the market over a time frame that is appropriate to the national circumstances of each member country.” This was estimated in March to come up to a total of 400 million barrels. Most of the IEA members have begun releasing their allocated reserves with the United States releasing the most and Japan the second most. The American release is to take place over 120 days into the month of July. Without the Strait opening up completely, the releases of the IEA member reserves could add about three million barrels of oil worldwide per day at a rate that has never been achieved in the past, and would last as long as about 135 days.
Dealing With Shortages: When it comes to petroleum scarcities, those customers in the rich world will generally be able to outbid those in the developing parts of the world as their governments can likely handle the debts needed to acquire the fuels and distribute them via subsidies in some affordable fashion to their populations. But wider fiscal debts have the tendency to weaken a country’s currency thereby compounding the problem with higher costs created in the foreign currency exchange. The poorer countries will likely have to resort to rationing. Bidding wars have already begun. In one case, the tanker Clean Mistral was sailing from America to Spain with a load of LNG when the load was resold to a different customer, and the ship was rerouted to a port in Asia.
Gulf Producers Are Not Immune to Economic Pain: The Gulf producers will also have some element of economic pain as their major products are trapped in transition by the closure of the Strait. As the storage facilities fill up, it will force the Gulf producers to dial back production. This production disruption can take several months to ramp back up again when the Strait is permanently open and oil is shipped without restriction or constraint. This production falloff could amount to as much as sixteen percent in Saudi Arabia and the UAE. It could be worse for Bahrain, Kuwait, and Qatar where Goldman Sachs estimates losses exceeding twenty-five percent of annual production. Along with oil other commodities that originate in the Middle East have been routinely shipped through the Strait. Qatar has had to suspend production at its huge aluminum facility, and Bahrain has halted exports from its aluminum plant owing to shipping disruptions, a declared force majeure, and damage from Iranian drone attacks to the plant. Tourism, a major industry in the area, has suffered almost everywhere owing to Iranian missile attacks on airports and other tourist venues. Even if there are no further attacks, tourism could be slow to recover. Over the years many of the Gulf producers have been able to attract investors to their securities markets bringing in major amounts of capital to their economies. The war, the Strait closures, and the extreme uncertainty of what the conclusion will bring has made many foreign investors refrain from investing in the area.
Role of the U.S. Navy in the Persian Gulf: The U.S. Navy has been suggested to escort tankers through the Strait in a manner similar to the one used during the Iran-Iraq war in the 1980’s where convoys of a handful of tankers would be escorted out by several U.S. Navy warships. But the 1980’s plan would be so slow in evolving these days it would take literally two and a half years to clear all of the stranded ships in Gulf ports. The risks become higher, as the ordnances become more capable of penetrating defenses. A serious drone strike that resulted in an oil spill or a tanker sinking could wind up slowing traffic for several months.
Conclusions: The price of crude oil has been as high as $150 per barrel since the war began February 28. Although it varies widely and has been trading recently into the low $90 per barrel range, it is safe to assume that the price will not be appreciably lower until the worldwide supply chain is again flowing smoothly. Additionally, many countries would be very wise to refill and/or increase their strategic storage supplies as soon as possible. The rule of thumb widely used in predicting gasoline prices is that a $10 rise in the price of a barrel of crude becomes a $.25 rise in the price of a gallon of gasoline. You can do the math where you live as the price varies widely across this country and in other countries.
Sources: The Economist, The Economic Fallout of the War, March 14, 2026.
ChapGPT.