As the U.S. and Israeli war on Iran rages and expands, the immediate focus is understandably on military issues such as airstrikes, missile defense, naval deployments, and retaliatory actions. Yet beneath the spectacle of war lies a far more consequential battlefield: energy and the global economy.
The Heart of the Global Energy System
The Middle East remains at the center of global energy. Even though there has been diversification of energy sources in recent decades, the region still accounts for roughly 30% of global oil production and about half of all global seaborne oil exports. The region’s centrality is reinforced by the Strait of Hormuz, through which nearly 20 million barrels of oil per day flow, amounting to roughly 20% of the world’s daily oil supply. This narrow waterway therefore remains the most important energy chokepoint in the global economy, making stability in the Middle East critical for countries that depend on imported energy.
The region is equally significant in the global natural gas market. The Middle East produces roughly 18% of the world’s natural gas and accounts for approximately 20-30% of global liquefied natural gas (LNG) exports. Qatar alone supplies nearly 20% of global LNG exports, and much of that supply must also pass through the Strait of Hormuz before reaching markets in Asia and Europe. Despite diversification in global energy production, the strategic importance of the Middle East – particularly the Strait of Hormuz – remains undiminished. Any disruption to this corridor would have immediate and far-reaching consequences for global energy prices, supply chains, and economic stability.
Energy markets have already begun reacting sharply. As of early March, global oil prices have risen by roughly 12% about $82 per barrel, up from the $65-$67 range before the war began. Even though OPEC producers have signaled their willingness to increase production to calm markets, prices continue to trend upward, reflecting deep uncertainty about the security of energy supplies from the Gulf. Natural gas markets have been even more volatile, with prices rising by more than 40% since the escalation began. For major energy importers such as India and China, which obtain close to half of their oil and natural gas supplies from the broader Middle East, these spikes could significantly increase energy costs, widen trade deficits, and intensify inflationary pressures at home.
Oil is not simply a commodity; it is embedded in the global financial system. Because oil is priced in dollars, rising oil prices force energy-importing countries to mobilize more dollars to maintain the same import volumes. For countries like India and China – both heavily dependent on imported energy – this places immediate pressure on exchange rates and trade balances. India imports more than 80% of its crude oil, nearly half of which comes from the Gulf. China, the world’s largest oil importer, relies heavily on Middle Eastern supplies as well, purchasing roughly 90% of Iran’s oil exports and sourcing close to half of its energy imports from the Gulf region. As a result, any surge in oil prices translates directly to higher import bills, currency pressures, and rising inflation in both economies.
Rising Energy Prices and the Immediate Economic Shock
Energy shocks quickly translate into broader economic stress, particularly by fueling inflation across the global economy. Higher oil prices increase transportation costs, raise the price of electricity and manufacturing, and eventually push up the prices of food, fuel, and consumer goods. For central banks in the United States and Europe, this complicates monetary policy. Interest rates, already elevated after the inflationary shocks of recent years, may need to remain high for longer, slowing economic growth.
For emerging economies, the dilemma is even sharper. Governments often attempt to shield citizens from fuel price shocks through subsidies, but such subsidies expand fiscal deficits and strain government budgets. India faces precisely this challenge. The Indian government provides substantial energy subsidies to its citizens. For fiscal year 2025-26, New Delhi has budgeted roughly 2 trillion rupees – $24 billion – primarily for subsidies on LPG cooking gas and fertilizers. However, if oil prices rise to around $80 per barrel or higher, these subsidies could increase by an additional 300 billion to 500 billion rupees, or $4 billion to $6 billion. This estimate assumes that the value of the Indian rupee remains stable, but historically, when oil prices rise, currencies of major oil-importing countries tend to weaken as demand for dollars increases. A depreciating rupee would therefore magnify the fiscal burden even further, potentially forcing the government either to borrow more or to allow higher energy prices to pass through to consumers.
At the same time, the war is forcing governments around the world to reconsider fiscal priorities. The war in Ukraine already compelled many European states to increase defense spending at the expense of welfare and climate commitments. A broader Middle East conflict could accelerate this shift. Defense budgets will rise, while investments in climate mitigation and sustainable development may, in the short run, be postponed.
China faces a different but equally serious vulnerability. As the world’s largest energy importer, its heavy reliance on oil and gas from the Gulf represents a significant strategic and economic vulnerability. Rising energy prices and supply uncertainty directly increase production costs for China’s vast manufacturing sector, squeezing profit margins in energy-intensive industries such as steel, chemicals, and electronics. This input inflation threatens the price competitiveness of Chinese exports, forcing manufacturers either to absorb higher costs or pass them on to global markets already struggling with inflation. While Beijing is attempting to mitigate the shock through increased purchases of discounted Russian energy and greater investment in domestic renewables, a prolonged disruption in Gulf energy supplies could undermine the trade surplus China depends on to offset its internal economic weaknesses.
India’s Fiscal Dilemma and China’s Energy Vulnerability
Ironically, the same conflict that raises oil prices in the short term may accelerate the long-term transition away from fossil fuels. When oil markets become volatile and unpredictable, energy-importing countries gain stronger incentives to diversify their energy sources. Renewable energy – particularly solar – becomes not merely a climate policy but a strategic imperative. For countries like India, expanding solar capacity reduces dependence on volatile global energy markets and strengthens long-term energy security.
Additionally, the falling price of solar energy relative to coal-powered thermal energy in India is accelerating the energy transition to renewables in India. However, given China’s overwhelming manufacturing advantage in the green energy sector, the global transition away from fossil fuels toward renewable energy could ultimately benefit China’s economy. Chinese batteries, solar cells, and electric vehicles are already flooding international markets – including India – potentially deepening India’s dependence on Chinese clean-energy technologies and widening its trade deficit with China.
The surge in energy prices also acts as a significant drag on global economic growth. Rising costs of energy increase the price of production and transportation, diverting capital away from more productive sectors of the economy. This input inflation forces prices higher for essential goods and services, eroding consumer purchasing power and compelling central banks to maintain high interest rates. Uncertainty surrounding Gulf energy supplies further destabilizes markets, discouraging corporate investment and weakening global economic confidence. If these elevated costs and supply anxieties persist, the global economy could face a heightened risk of recession, marked by declining industrial output and a slowdown in international trade. Ultimately, a prolonged war with Iran could trigger a massive supply shock by disrupting the Strait of Hormuz, potentially pushing oil prices above $100 per barrel and tipping the world toward stagflation.
The deeper question raised by this conflict is not simply who wins the war on the battlefield but what kind of world economy will emerge from it. Energy shocks have historically triggered recessions, inflationary spirals, and geopolitical realignments. If the Strait of Hormuz remains closed and oil supplies continue to be disrupted, the consequences will extend far beyond the Middle East. It will affect the economies of the region itself by constraining their energy exports, while also impacting countries that depend heavily on Middle Eastern energy, including Europe, Japan, South Korea; many nations of the Global South; and particularly the two major drivers of global economic growth today, India and China.
Policy Considerations
For countries dependent on Gulf oil, there are no immediate policy solutions to cushion the economic shock caused by disruption in the region. However, the crisis presents an opportunity for governments to rethink their energy strategies. One obvious response is diversification. Another option is to build large strategic energy reserves – an expensive undertaking, but one that may prove to be a worthwhile investment given the growing volatility of the global system.
In the emerging era of re-globalization, countries are increasingly prioritizing the safety and resilience of supply chains over cost and efficiency. Reducing reliance on a single region for energy will therefore become an urgent policy objective.
A second adjustment is accelerating the transition to renewable energy. Many countries in the Global South, in particular, have enormous potential for solar energy if the political will exists to harness it. Yet here too policymakers face a dilemma: The fastest and most cost-effective path to renewable energy currently involves heavy reliance on China, which dominates global solar technology and supply chains.
Countries like India, whose economies are deeply exposed to Gulf energy supplies, are likely to feel the impact of this war acutely. The broader lesson for policymakers in Europe, Japan, South Korea, India, China, and across the Global South is clear: They cannot afford to remain passive observers of geopolitical conflicts in critical regions.
This analysis was published in collaboration with the Middle East Policy Council.
The views expressed in this article are those of the author and not an official policy or position of New Lines Institute.