How the Iran-Israel War Is Affecting the Global Economy? Energy supply disruptions from the Persian Gulf are shaking financial markets worldwide

The consequences of the war between the United States, Israel, and Iran are gradually becoming visible in the lives of people around the world, no matter where they live.

Disruptions in exports of oil, gas, and other commodities from the Persian Gulf region, along with simultaneous production cuts by some oil-producing countries, have caused a supply shock that has driven prices higher.

This situation has shaken financial markets. However, its impact is not limited to markets alone, as gasoline and diesel prices are also rising at gas stations.

The consequences could be widespread, with the possibility of rising prices for a broad range of goods and services, from food to air travel.

Analysts have also increased the likelihood of an economic recession, leaving some countries more vulnerable than others.

Hunter Kornfeind, senior energy macroeconomic analyst at Rapid Energy Group, said, “This is actually the biggest supply shock, at least in the modern history of the global oil market.”

Drivers around the world are now feeling this at gas stations.

According to the American Automobile Association, in the United States the average price of gasoline has risen from about $2.92 a month ago to more than $3.5 per gallon. During the same period, the price of diesel has also increased from $3.66 to $4.78.

In the United Kingdom, the latest data from RAC shows that since the start of the war the average price of petrol has increased by 4.95 pence to 137.78 pence per liter, while diesel has risen by 9.43 pence to 151.81 pence per liter.

Typically, there is a time lag between changes in the oil market and their reflection in fuel prices, and it usually takes about two weeks for these changes to appear at gas stations.

Meanwhile, nearly half of Europe’s jet fuel comes from the Persian Gulf region. Disruptions in this supply have nearly doubled the price of European benchmark jet fuel, reaching its highest level since Russia’s war in Ukraine began.

Fuel typically accounts for between 20 and 40 percent of airlines’ operating costs, so flights could become more expensive, and if fuel shortages occur, some flights may be canceled.

However, this impact will not be the same for all airlines.

Many European airlines use futures contracts months or even years in advance to purchase fuel so that the price is fixed or capped within a certain range.

In contrast, some major American airlines do not have such contracts and may therefore face price increases in the short term.

United Airlines CEO Scott Kirby recently warned that higher costs could mean that airfare increases will “probably start very soon.”

Very serious consequences

But the economic consequences of this situation could spread rapidly.

Analysts say that if the conflict is not resolved by the end of this month, global oil prices could surpass the 2022 peak reached after Russia’s invasion of Ukraine. In some scenarios, oil prices are expected to reach $150 per barrel.

Hunter Kornfeind says the knock-on effects on the economy will be “very severe,” as rising costs will force households and businesses to cut other spending, slowing the pace of economic growth.

For example, analysts fear that the energy crisis could lead to a decline in chip production, a sector that has wide-ranging effects on everything from cars to smartphones, because Taiwan, a center for manufacturing these components, relies heavily on energy imports.

In the United States, some have warned that rising energy costs could put pressure on technology companies developing artificial intelligence infrastructure, potentially harming a key driver of economic growth.

Analysts believe the greatest economic risks are in Asia and Europe, because both regions rely heavily on energy imports, unlike the United States, which is the largest producer of oil and gas.

Some Asian governments, which are major destinations for Middle Eastern oil and gas, have already announced price reductions and rationing measures. According to state media, universities in Bangladesh have also been closed early for the Eid al-Fitr holidays.

These concerns have also been reflected in stock markets, with stock indices in Asia and Europe falling more sharply than in other regions.

For example, since the start of the war, major stock market indices in Japan and South Korea have fallen by about 10 and 15 percent respectively, and Germany’s DAX index has dropped by more than 7 percent.

In contrast, the S&P 500 index in the United States has fallen by only 1.2 percent.

However, energy is not the only commodity affected.

The Middle East is also an important source of aluminum and sulfur which is used in processing metals such as copper—as well as raw materials for producing chemical fertilizers including urea.

As the prices of these commodities gradually increase, cost pressures may also spread to food and manufactured goods.

According to the American Farmers Federation, about 25 percent of U.S. fertilizer imports arrive in March and April, which coincides with the start of the growing season.

Harry Ott, a farmer growing cotton, corn, and soybeans in South Carolina, said, “This happened at the worst possible time.”

Last week he contacted a fertilizer supplier to spread fertilizer on his fields but was told that fertilizer sales and deliveries had been suspended until the consequences of the war became clear.

The company has since announced price increases, and Harry Ott is concerned that the cost of fertilizer needed for his farms could increase by about $250 per hectare, effectively eliminating any chance of making a profit from this year’s crop.

“This is a very difficult time, and what is happening in the fertilizer market right now is completely unexpected. There was no room in anyone’s balance sheet for such an adjustment,” Mr. Ott said at a news conference organized by the farmers’ federation.

Harry Ott’s business is another unexpected casualty of a war that has affected everyone in one way or another.