The Risk the War in Iran Poses to the Global Economy

0:00 Hey everyone, it's Richard.

0:00 You're watching the Plain Bagel.

0:01 Following months of growing tensions and years of strikes being exchanged,

0:07 the US and Israel carried out a joint attack on Iran this past Saturday,

0:11 dubbed Operation Epic Fury.

0:13 Uh the stated goal of the attack was to eliminate

0:16 the imminent nuclear threat posed by the Iranian regime,

0:19 destroy its ballistic missile arsenal,

0:21 degrade its proxy terror networks, and its navy forces.

0:25 However, with the strikes also killing the country's supreme leader,

0:27 Ayatollah Ali Khamenei,

0:29 and Trump calling on the people of Iran to overthrow their government,

0:32 despite Pete Hegseth pointing otherwise,

0:34 it seems pretty clear that the intent here

0:36 is a complete regime change for the country.

0:39 And while the initial attack from the US was very swift,

0:41 the conflict has very quickly escalated throughout the region,

0:44 with Iran launching a number of attacks against neighboring countries,

0:48 particularly ones hosting US troops,

0:50 and Trump suggesting the military operation could last four to six weeks.

0:54 Now, in addition to debates over the attacks,

0:56 with many weighing the oppressive and deadly force

0:58 that Iranian regime has been in the region,

1:01 with the civilian casualties we've already seen caused by the US strikes,

1:04 and the general unstable nature of the region,

1:06 one of the stories we've seen many outlets covering with this update

1:10 is how disruptive this conflict might end up being for the global economy,

1:14 which naturally, in the face of the horrors of war, is not a key priority here.

1:20 But there is expected to be a fairly

1:21 far-reaching implication from the conflict that we're seeing.

1:26 Which might be surprising for some.

1:27 Iran is, after all, a fairly isolated country.

1:30 It was, up until 2022, the most heavily sanctioned country in the world until

1:35 it was replaced by Russia following the invasion of Ukraine.

1:39 And the country has long operated as a bit of a hermit in the region.

1:42 So, most would probably anticipate pretty limited

1:45 economic fallout from a war in the country.

1:49 But that's actually far from the case.

1:51 So, today, we'll go over the risks

1:52 the conflict in Iran poses to the global economy,

1:55 and why economists are bracing for pretty far-reaching impact here.

1:59 Uh not to make light of the other more horrific aspects to this development,

2:03 but as an economics and finance channel,

2:05 I think it's worth diving into the implications here,

2:07 and why people who are even far removed from the region might see an impact.

2:12 Now, Iran, as mentioned, is a fairly economically isolated country,

2:16 uh thanks to the slew of sanctions it faces from developed nations.

2:19 The country, an authoritarian theocracy,

2:22 was first designated a state sponsor of acts

2:24 of international terrorism by the US back in 1984,

2:28 with the country being a key backer of groups like Hamas and Hezbollah.

2:32 And while the country did sign a deal, the Joint Comprehensive Plan of Action,

2:35 or simply the Iran nuclear deal for short,

2:38 back in 2015 to have some sanctions lifted in exchange

2:41 for the reigning in of its nuclear development programs,

2:44 the US itself pulled out of the deal in 2018,

2:46 while the United Nations found Iran in non-compliance back in 2025,

2:51 leading to the reimposition of restrictions.

2:53 With there long being concerns that Iran is secretly developing nuclear weapons.

2:57 Now, while the UN has focused on more targeted sanctions,

3:00 freezing assets for certain individuals and organizations,

3:03 and restricting nuclear and weapons development,

3:05 the US has been more broad with its restrictions,

3:08 forbidding nearly all trade, financial transactions,

3:10 and investments in the region,

3:12 beyond actions authorized directly by the government,

3:15 with humanitarian exceptions only granted for a select

3:18 few products like food and medicine.

3:20 This, combined with Iran's reliance on oil,

3:22 has made the country's economy fairly volatile.

3:25 Despite Iran having double the population of Canada, for example,

3:28 its economy is roughly 1/5 Canada's

3:31 size when measured in gross domestic product,

3:33 with exports likewise being a fifth of Canada's own.

3:36 Nonetheless, Iran has remained a key supplier

3:39 in the very important market of energy, in particular crude oil.

3:43 Uh you see, Iran actually produces about 4% of the world's oil,

3:47 with the country hosting the third largest oil reserve in the world,

3:51 making up about 12% of global reserves.

3:54 And while some of the sanctions against Iran

3:56 restrict the country's ability to sell this oil,

3:58 the country has been able to continue shipping the product

4:01 thanks to sophisticated black market channels it's developed over time.

4:05 With the country sending the vast majority of its oil exports, over 80%,

4:09 to China, making it the second largest source of crude for the country.

4:12 With an estimated 520 million barrels being sent to China in 2025.

4:17 Because of this, any conflict with Iran has historically trans lated

4:20 into a jump in oil prices on the expectation of supply tightening up.

4:24 And this circumstance is no different.

4:26 In fact, with the attack from the US and Israel,

4:29 we've seen the West Texas Intermediate reach nearly $90 a barrel,

4:33 up over 30% over the span of a week.

4:37 While the Brent Crude Index has risen 25% to $91 a barrel.

4:42 But it's not actually the impact to Iran's own

4:44 oil sales that's primarily contributing to surging prices here.

4:47 While that certainly plays a role,

4:49 most people have been pointing to another, more far-reaching variable here.

4:54 The Strait of Hormuz.

4:55 You see, the Strait of Hormuz is a vital waterway

4:58 that connects the Persian Gulf to the Gulf of Oman.

5:01 It's where many of the world's largest oil producers, including Saudi Arabia,

5:05 the United Arab Emirates, and Iran itself,

5:08 send out their oil to international markets.

5:11 In fact, about 31% of all seaborne crude and about 1/5

5:15 of global crude oil passes through the strait on a daily basis.

5:20 So, you can see how important the waterway is to global oil markets.

5:23 And Iran happens to border the strait on the northern side,

5:27 including the passageway's most narrow choke point at just 33 km wide.

5:32 So, there's long been this concern that Iran could cut off

5:35 the world from about a fifth of its total oil supply.

5:39 And on Monday, we saw that risk become reality when the Islamic

5:44 Revolution Guard Corps announced that they would be closing the strait,

5:48 warning that it would set any vessel attempting to pass through a blaze.

5:51 With eight vessels having already been struck in the strait and a number

5:55 of shipping companies suspending all vessel

5:57 transit and anchoring ships to avoid attacks,

6:00 effectively killing transit in the channel

6:03 and leaving hundreds of ships stranded.

6:05 So, right away you can see why some are forecasting

6:07 a pretty meaningful economic impact from the conflict in Iran.

6:11 While it's true that about 84% of the crude oil

6:14 and condensate that comes from the strait is sent to Asian countries,

6:18 including China, India, Japan, and South Korea,

6:21 oil prices will likely rise globally if the closure is

6:24 maintained as these countries turn to other markets for their supply.

6:27 With a Concaya, a senior portfolio manager with Newberger Berman,

6:31 warning that a disruption lasting over a month

6:33 could send prices well into the triple digits,

6:36 something we haven't seen since 2022.

6:39 As you might be aware,

6:40 oil has a fairly broad impact on global economic activity.

6:43 Oil is used for everything from electricity generation and fuel

6:47 to the production of a slew of end products and compounds.

6:51 So, beyond the direct impact we can see on things like gasoline prices,

6:54 any increase in oil's price tends

6:56 to reverberate across a slew of production chains.

6:59 Not to mention that as fuels become more expensive,

7:01 it becomes more expensive to ship and transport goods.

7:04 So, even products not directly derived from petroleum

7:08 could still see a meaningful price impact.

7:10 Now, importantly, we have to mention that there are alternatives

7:13 to the Strait of Hormuz for transporting

7:15 Middle Eastern oil to international markets.

7:18 As you can expect, the closure of the strait has long

7:20 existed as a threat to the region given Iran's history and instability.

7:24 So, nations have put effort into developing alternative export routes.

7:28 Saudi Arabia, for example,

7:29 has pipeline capacity for 5 million barrels per day that can reach the Red Sea,

7:34 with this covering most of the oil

7:35 the country exported through the strait in February.

7:38 While the UAE has infrastructure that reaches the Gulf of Oman directly.

7:42 So, it's unlikely we truly see 20%

7:44 of the world's oil supply just disappear here.

7:47 However, with the Red Sea, there's risk there as well,

7:49 given that we've seen Houthi rebels based

7:52 in Yemen strike freight vessels in the past,

7:54 with that group notably being backed by Iran.

7:56 The current conflict has seen some

7:58 critical infrastructure damaged in the region,

8:00 including refineries, oil storage, a fuel tank terminal,

8:03 and Oman's port of Duqm.

8:05 With Rystad Energy estimating that even with these alternatives available,

8:09 we could still see crude oil supply drop by 8 to 10 million barrels per day,

8:14 equivalent to nearly 10% of global supply.

8:17 So, there's still likely to be a very meaningful impact.

8:20 And even beyond oil, there are a number of other disruptions

8:23 that pose threats for the global economy.

8:25 Uh the strait is also a key passageway for liquefied natural gas,

8:28 which itself is used for heating, electricity, and generally as a fuel.

8:32 Uh so, disruptions to that commodity

8:34 will likewise translate into similar impacts,

8:36 with natural gas futures prices having

8:38 already jumped over 60% in European markets.

8:41 We also see about a third of the world's urea,

8:43 a key nitrogen-based fertilizer, flow through the passageway.

8:47 So, this could also have a direct impact on food prices,

8:50 with that commodity having seen its price jump 25% since the initial attack.

8:54 The conflict has also disrupted air travel,

8:56 with flights being canceled amid airspace closures in the Middle East.

9:00 And marine insurance companies have already sought

9:01 to cancel coverage for war risks related to Iran,

9:05 an issue likewise faced by airline companies,

9:07 which are now experiencing a gap in their coverage.

9:10 Something that's likely to discourage companies from operating in the region

9:13 if they can't get protection from these catastrophic risks,

9:15 with tanker prices already jumping internationally

9:18 on the disruption in the region.

9:19 And when we look to neighboring countries in the region,

9:22 we of course can expect much more acute pressures.

9:24 Many of the Gulf countries have nationalized their oil production,

9:27 meaning that any impact to their ability

9:29 to export oil directly decreases government revenue,

9:32 which naturally has broad-reaching impacts for the country as a whole.

9:35 On top of this, war in general tends to contribute to capital flight,

9:38 weaker economic activity, and higher inflation for nearby countries.

9:43 And as risks for operating in the region increase,

9:45 it's more likely to discourage that economic activity.

9:48 This is especially true for industries like tourism,

9:50 which some Gulf countries are fairly reliant on.

9:53 The UAE, for example, derives 14% of its GDP from the industry.

9:57 And then there's of course the more direct risk of capital impairment,

10:01 a risk again we're already seeing play out

10:03 to an extent with Saudi Aramco, for example,

10:05 Saudi Arabia's state-run oil producer and the largest oil company

10:09 in the world having itself been targeted by drone strikes,

10:12 albeit with seemingly no damage to its infrastructure.

10:15 So from the acute impact to the region

10:17 to the more far-stretching inflation implications and trade disruptions,

10:22 a war in the region is likely to be

10:23 highly disruptive to the global economy even with Iran's isolation.

10:28 And if the conflict stretches longer than anticipated,

10:31 these impacts could naturally be quite meaningful.

10:34 Using the Kiel Institute's price of war calculator, for example,

10:37 which uses 2023 data and assumes an average war that lasts 3.5 years,

10:42 we can see that a war in Iran could

10:44 cost the country nearly $1 trillion in lost capital,

10:48 nearly $600 billion in lost GDP,

10:51 and cause the economy to contract over 30% all over a five-year period.

10:56 While other countries could cumulatively see a GDP loss of over $1 trillion.

11:01 Now, apparently that's a very crude estimate that assumes

11:03 things escalate far beyond what we're currently seeing.

11:06 But given the history of Middle Eastern

11:07 conflict stretching well beyond their initial scope,

11:10 it is a risk that's faced here.

11:12 Now when it comes to the impact on the US specifically,

11:14 there's long been this view that war is

11:16 actually good for business as evil as that sounds.

11:20 Namely because the government tends to increase

11:22 spending during geopolitical conflicts and because

11:25 the US is very far removed from the devastation of these types of engagements,

11:30 some hold the view that economic activity thrives during wars.

11:33 And certainly we have seen periods in history

11:35 of GDP growing strongly during major conflicts.

11:38 And certain players will benefit from the current war.

11:41 However, even with America's privileged position,

11:42 there's still some meaningful negative consequences

11:45 to its economy from these types of engagements.

11:47 For one, US inflation tends to spike during

11:49 geopolitical conflicts in part from this higher government spending.

11:52 Something that will obviously be more pronounced

11:54 here given the impact on the oil market

11:55 and the broad disruptions to trade with freight rates

11:59 likely to surge and trade volumes likely to decrease.

12:02 This may also lead to an increase in interest rates.

12:04 The Federal Reserve is still grappling

12:06 with the impacts of tariffs on price levels

12:08 and may have to switch to hiking rates should we see a new inflation risk.

12:12 And while US Treasury bond yields tend to decrease during geopolitical conflicts

12:16 as investors buy the asset as a safe haven investment to protect their money,

12:20 we've so far actually seen yields increase slightly

12:23 with fears over inflation seemingly offsetting this factor.

12:26 Finally, we tend to see US debt increase

12:28 during wars again because of that heightened spending,

12:30 which could prove problematic given the pressure

12:32 on interest rates and the lost tariff revenue

12:34 the White House experienced last month from the Supreme

12:36 Court's ruling that Trump's IEEPA tariffs were illegal.

12:40 I also won't spend a tremendous amount of time

12:41 on stocks given the nature of the situation,

12:44 but it is worth noting that while certain sectors of course

12:47 experience a range of impacts during geopolitical conflicts in the short term,

12:52 US stock market valuations in general haven't

12:54 historically exhibited a direct relationship with geopolitical

12:57 conflicts over the long term according to the Institute of Economics and Peace.

13:01 And while stocks do tend to experience a sell-off in the short term,

13:04 returns tend to normalize thereafter

13:05 with performance often dominated by other variables.

13:08 All to say it's not usually wise to trade off

13:10 of short-term geopolitical headlines if you're investing for the long term,

13:14 especially given that we just don't know how things will ultimately settle.

13:17 Uh but that's the economic situation with Iran as it's currently been assessed.

13:21 Given that this is a developing story,

13:23 obviously many factors are going to be changing here.

13:25 The US, for example,

13:26 has already highlighted that it'll provide insurance and escort ships

13:29 through the Gulf to combat Iran's closure of the Strait.

13:32 So, while that likely won't offset the full impact,

13:34 that is certainly something that could lessen the blow.

13:36 And we could see other factors depress oil prices from here.

13:39 OPEC plus, for example,

13:41 the Organization of Petroleum Exporting Countries plus other group participants,

13:45 recently opted to raise oil production by over 200,000 barrels per day

13:49 and could easily push this level higher should pressure on supply continue.

13:53 So, while the group includes many

13:54 of the Gulf countries impacted by the war here,

13:57 some other nations may be able to bolster supply amid the conflict.

14:01 We also, of course, have no concept of how long this conflict might last.

14:04 We could see other countries pulled into this like Russia and China,

14:07 who is an important lifeline for Iran.

14:09 However, the two countries, while denouncing the attacks,

14:11 have so far avoided intervening.

14:13 But if history is any precedent,

14:14 it's likely we do see things stretch out for some time.

14:17 And even if their running regime is taken down,

14:18 there's the risk of a power vacuum

14:20 forming and other violent groups taking control.

14:22 So, a 4-to-5-week time frame does seem fairly optimistic.

14:26 Nonetheless, we'll just have to wait and see how things develop from here.

14:29 Uh thanks for watching.

14:30 I hope you found this video helpful.

14:32 If you did, please do make sure to like, subscribe, all that good stuff.

14:34 It does help the channel tremendously.

14:35 And if you're interested in learning more

14:36 about how war generally impacts economic activity,

14:39 I'll link to a video that I put out

14:40 last year on that topic that you can check out.

14:43 Thanks again for joining.

14:44 See you in the next one.