What does the Iran crisis mean for the global economy?

The current crisis in Iran — sparked by the stunning joint US-Israeli attacks on 28 February 2026, which quickly escalated into full-scale armed conflict — continues to send shockwaves through the global economy. What was initially framed as a precise, limited military operation to neutralise threats from Iran’s nuclear programme and regional proxies has morphed into a protracted confrontation with far-reaching consequences for growth, inflation, energy security and geopolitical stability.

At the centre of this turmoil lies the Strait of Hormuz, the narrow waterway that normally carries around 20-25% of the world’s seaborne crude oil trade and a substantial share of liquefied natural gas (LNG). Iran’s retaliatory actions — bombardments of energy facilities in Saudi Arabia, the UAE and other Gulf states, coupled with drone and missile strikes on commercial shipping — have severely disrupted transit. Tanker traffic has plummeted, with many vessels avoiding the route altogether due to heightened risks. 

Oil prices reacted dramatically: Brent crude surged from below US$70 per barrel in late February to highs near US$120 in early March, before settling into a volatile range of US$90-US$100 amid partial recoveries and ongoing uncertainty. This spike has immediately translated into higher gasoline and diesel costs worldwide, inflating household budgets, raising freight and airline expenses, and pushing up prices for petrochemical-based goods from plastics to fertilisers.

The inflationary impulse is merely the opening act in a broader chain reaction. Beyond crude oil, the conflict has choked off key export routes for petroleum derivatives. Iran and its Gulf neighbours dominate production of critical materials like sulfur — vital for sulfuric acid used in aluminium smelting, nickel processing, and battery manufacturing for electric vehicles — as well as ammonia- and urea-based fertilisers essential for global agriculture.

With shipping lanes imperilled and storage facilities targeted or at risk, exports of these products have largely stalled. Industries from automotive and aerospace to electronics and farming now face acute shortages and soaring input costs, creating cascading bottlenecks in global value chains already strained by post-pandemic recovery and prior supply shocks.

Compounding these supply-side pressures is the looming threat of demand destruction. Sky-high energy prices erode consumer purchasing power, particularly in energy-importing economies. Transportation, heating and manufacturing costs rise, squeezing disposable income and corporate margins. In a global economy still fragile from the 2020-2021 pandemic aftermath and the 2022-2024 inflation surge, households and businesses have limited buffers. National debt levels remain elevated in many advanced economies, constraining fiscal space for stimulus. Labour markets show signs of softening in key regions. The Iranian conflict risks amplifying these vulnerabilities far beyond the scale seen after Russia’s 2022 invasion of Ukraine — when energy markets were already tight, but global growth had more momentum and policy room was greater.

This crisis must be viewed through the lens of intensifying US-China strategic rivalry. The Trump administration’s decision to launch strikes against Iran appears rooted in a broader effort to deny Beijing access to affordable energy sources. Previous moves — sanctions on Venezuelan oil, tentative rapprochement with Russia early in Trump’s term and now direct action against a major supplier to Asia — suggest an intent to squeeze China’s energy lifeline. Iran has long been a key, albeit sanctioned, provider of discounted crude to China, often via “shadow fleets” that evade Western restrictions. Beijing’s massive stockpiles and diversified sourcing (including heavy reliance on Russia via pipelines) have helped cushion initial blows.

Yet recent developments reveal a shifting dynamic that undercuts Washington’s leverage. Despite the military audacity of the 28 February strikes — which eliminated key Iranian figures including Supreme Leader Ali Khamenei and degraded parts of its nuclear and missile capabilities — the conflict shows signs of bogging down. 

US and allied forces face persistent Iranian asymmetric responses: continued harassment of shipping, attacks on Gulf infrastructure and threats to escalate further. Domestic US opinion is turning sour as gasoline prices climb and the fiscal burden mounts amid already massive deficits and debt. Reports indicate internal debates within the administration about an exit strategy, with some aides pushing to declare objectives met while others warn of political fallout from prolonged entanglement.

Critically, the Strait of Hormuz has not been fully sealed. Iran has selectively permitted certain transits, particularly those bound for China. Vessel-tracking data shows millions of barrels of Iranian crude continuing to flow eastward — over 11 million barrels in the first weeks alone — much of it destined for Chinese refineries. Beijing has reportedly engaged in direct diplomacy with Tehran to secure safe passage for select tankers, including those carrying Qatari LNG or Iranian exports paid in RMB.

This arrangement allows China to extract a significant portion of its needed oil despite disruptions affecting Western and other Asian importers. China’s strategic reserves, built up aggressively in recent years, combined with rerouting from Russia and opportunistic purchases, provide remarkable resilience. While global markets grapple with shortages and price volatility, Beijing appears better positioned to weather the storm, maintaining industrial output and economic momentum.

Trump’s abrupt cancellation of a planned diplomatic trip to Beijing — intended perhaps to leverage the crisis for concessions on trade, technology or Taiwan — further signals eroding US leverage. Rather than strengthening Washington’s hand by demonstrating resolve, the Iran conflict has exposed vulnerabilities: overstretched military resources diverted from the Indo-Pacific, ballooning costs at home, and limited ability to isolate China from energy markets.

Beijing, far from losing influence in the Gulf or Global South, is quietly consolidating gains through pragmatic energy diplomacy and RMB-based deals. If the US becomes mired in a drawn-out Middle East quagmire — draining attention, funds and assets needed for containing China elsewhere — Beijing could gain precious breathing room to advance priorities like Taiwan reunification or Belt and Road expansion.

In essence, the Iranian crisis underscores oil’s enduring role as the global economy’s lifeblood. Disruptions here reverberate far beyond inflation, threatening supply-chain integrity, industrial production and consumer demand. While the US projected military dominance initially, the emerging picture reveals limits to coercive power in an interconnected energy landscape. China’s ability to sustain oil inflows through the Strait — bolstered by Iranian incentives and its own stockpiling — highlights Beijing’s strategic depth and adaptability.

As the conflict drags on without clear resolution, the balance in great power competition tilts subtly toward resilience over raw force. The path forward hinges on de-escalation, but the window for a decisive US advantage appears to be narrowing rapidly.

Related: Why America fights alongside Israel as China holds back in Iran | Will China send warships to the Strait of Hormuz?