The economic shockwaves produced by the US-Israeli offensive against Iran have rippled across global markets with a force not seen since the COVID-19 pandemic. Oil prices have surged. Tens of thousands of flights have been cancelled. Stock markets around the world have experienced significant volatility. Commercial shipping costs in the Gulf have risen sharply. And President Donald Trump, showing no inclination to end the campaign short of Iran’s unconditional surrender, has made clear that the economic disruption is far from over.
The military operations driving the economic shock have been relentless. American B-2 stealth bombers have struck Iran’s buried missile infrastructure with dozens of 2,000-pound penetrating munitions. A large Iranian naval vessel has been hit and possibly destroyed. Israel has issued mass evacuation orders in Lebanon covering over one million people and struck Hezbollah positions across Beirut. The defense secretary has confirmed that US military operations are about to surge dramatically in scale.
Iran’s retaliatory campaign has specifically targeted economic infrastructure alongside military targets. Missiles and drones have struck at oil pipelines and other energy facilities in Gulf states. Several attacks on Gulf energy infrastructure have been confirmed, raising fears about the security of oil supplies that the global economy depends on. The targeting of energy infrastructure by Iran suggests a deliberate strategy of imposing economic costs on the US-allied Gulf states to create political pressure for the campaign to end.
The oil market reaction has been significant. Prices have risen sharply since the conflict began, as traders price in the risk of prolonged disruption to Gulf oil production and transport. The Gulf region produces a substantial share of the world’s oil, and any sustained disruption to its production or transport routes would have severe consequences for the global economy. Energy-importing nations in Asia and Europe are watching the conflict with particular concern, as their energy security is directly affected by events in the Gulf.
Trump has dismissed the economic disruption as a temporary and acceptable cost of a campaign that will, in his view, produce lasting regional stability and eventually lower energy prices through the elimination of Iranian-sponsored instability. The financial markets’ reaction suggests that investors are not yet convinced by that argument. The longer the conflict continues and the wider the economic disruption spreads, the harder that argument will become to sustain.