US and Israeli military action against Iran is now in its fourth week. The economic impact is clear. This is a war of choice, as it is evident Iran posed no imminent threat to the US. Like Iraq, Iran has no weapons of mass destruction, though Israel and the US have nuclear weapons. The consequences are being felt by Iran and the countries hosting US bases. The destruction of upstream energy capabilities and the closure of the Strait of Hormuz are having global repercussions.
The head of the International Energy Agency, Fatih Birol, a Turkish economist and energy expert, warned on Thursday that the conflict has caused “the greatest energy security threat in history.” He added that it could take six months or longer to fully restore oil and gas flows from the region. The region accounts for 20 per cent of the global oil and gas supply, 30 per cent of global agricultural inputs and a host of other derivative products used in key industries, including semiconductors, which are now used in every economic activity.
Whilst most of the region’s energy output goes to Asia, a supply shock of this scale triggers global displacement as companies seek alternative supply sources, thus driving up costs. Nominal Brent and WTI prices, as quoted in newspaper headlines, don’t reveal the full impact. The Telegraph’s International Business Editor remarked yesterday, “the Russia shock in 2022 was a picnic compared to what is now happening. The world will hit a brick wall within two months.” He argued that the regional outlook has deteriorated since Israel’s attack on Iran’s South Pars gas field, which expands the scope of targets to upstream gas and oil infrastructure on both sides of the Gulf.
To illustrate these regional displacement effects and their wider impact, he noted, “Actual barrels of Dubai basket and Oman’s Murban are near $170 each as Asian refiners scramble to buy whatever they can. Jet fuel deliveries reached $210 in Rotterdam and $240 in Singapore.” Meanwhile, in the US, gasoline pump prices now average US$4 a gallon compared to US$2.98 on February 27.
Trump publicly chided Israel for escalating the conflict by attacking Iran’s South Pars gas field. The resulting economic impact led the President to lift sanctions on Russian and Iranian energy supplies for the next 30 days. This move aims to prevent energy shortages that could disrupt the global economy and burden American consumers. The underlying bet is that tensions in the Gulf will subside within this period; otherwise, further actions will be needed. What will this military escalation look like, and what will be the additional consequences for the rest of the world?
Israel’s unilateral action reveals that the US and Israeli objectives are divergent. While a fractured Middle East may strengthen Israel, it also fuels global uncertainty. So is systematically assassinating Iranian leaders, ensuring that hardliners will emerge to prolong the hostilities, complicating the conditions for peace. The US, though self-sufficient in oil, gas, and food, remains vulnerable due to its reliance on foreign industrial inputs—undermining its hegemonic ambitions. Additionally, Americans feel the inflationary effects of such instability acutely, as does the rest of the world.
The current impasse in the Persian Gulf clearly shows the limits of American military power in the region, particularly when relying solely on air power. Although Iran’s navy and air force have been destroyed, Iran remains capable of military retaliation, especially if it could launch missiles at Diego Garcia, 4000 kilometres away. Furthermore, the exchange ratio—the cost of the drones and hypersonic missiles which Iran produces, versus the cost of US defensive missiles—gives Iran an advantage. As a result, it is truly remarkable that the US, the country with the most powerful navy in the world, is unable to guarantee safe passage through the Hormuz Strait and maintains its fleet a safe distance away while calling on its allies for assistance.
It is unclear how or when the war in Iran will end. More countries now back reopening the vital Strait of Hormuz after US President Donald Trump called for NATO involvement. While this is not NATO’s fight, as several NATO members have told President Trump, Iran’s control of the Strait impacts the world economy and OECD nations’ financial interests.
Energy prices in the Caribbean have yet to rise, but increases are inevitable. Governments lack the fiscal capacity to cushion this impact. At the same time, rising bond yields, driven partly by the war, are increasing borrowing costs for these already highly indebted countries.
Many Caribbean territories rely on tourism and imported food, making them susceptible to fluctuations from externally generated inflation and the negative impact on the cost of living and income distribution. When airfares and hotel prices rise due to higher fuel costs or inflation reduces the disposable incomes of potential visitors, tourism declines everywhere. Similarly, the planting season cannot be delayed due to climate constraints; rising fertiliser costs drive up food prices, local and imported.
A prolonged war in Iran will devastate developing and middle-income countries everywhere, causing persistent economic damage that will last well after the conflict ends. The longer the war, the worse the adjustment process.
Mariano Browne is the Chief Executive Officer of the UWI Arthur Lok Jack Global School of Business
