Middle East Conflict Triggers a Global Economic Cost Crisis

Why Might Soaring Oil Prices Trigger a Stagflation Crisis?

Military actions by the U.S. and Israel in the Middle East have caused spillover conflicts, rapidly escalating the situation and potentially triggering a series of crises beyond just oil price shocks.

Written by: Special Contributor Jin Yan, Caijing, from Washington

Edited by: Su Qi

While the outside world generally interprets the US-Iran negotiations as a sign of easing relations, on February 28, the U.S. and Israel launched a large-scale joint military strike against Iran. Iranian Supreme Leader Khamenei was assassinated in an attack on the morning of February 28. The Pentagon named this operation “Epic Fire,” while Israel called its parallel actions “Roaring Lion.” Iran immediately responded with missile and drone attacks against Israel. As of press time, the conflict has lasted nearly two weeks, involving at least 12 countries, and surpassing limited strikes aimed at deterrence, weakening, or targeted elimination, with economic and political shocks sweeping globally.

Since President Trump took office, the U.S.-Israel military actions against Iran have occurred seven times. From the start, these operations carried clear “decapitation” and “regime change” signals. Trump explicitly stated that the goal was to overthrow the Iranian regime, with Israel targeting Iran’s highest authority. Early in the conflict, Trump said Iran “is a major power,” and military operations might take about four weeks, “or less,” depending on the government’s current timeline expectations. However, subsequent statements from the president and his officials have been inconsistent regarding the timeline and objectives. Sometimes they implied the aim was unconditional regime change and continued fighting until Iran surrendered; other times, they claimed the military had achieved its goal of destroying Iran’s military capabilities.

As the conflict rapidly escalates, its intensity and scale far exceed typical boundaries of Middle East crises, evolving into a systemic crisis affecting regime stability, regional security, global energy transportation, and international market expectations.

Multi-Dimensional Warfare

Another front has emerged. U.S. medical technology giant Stryker recently suffered a large-scale cyberattack, causing global system disruptions and preventing tens of thousands of employees from accessing internal networks. After suspected cyberattacks linked to Iran, Stryker’s stock fell about 3% on Wednesday. A hacker group close to Iran, Handala, claimed responsibility on Telegram, stating they had wiped out 200,000 systems, stolen 50TB of data, and targeted office networks in 79 countries. They said this was retaliation for U.S. actions against Iran.

Iran’s other weapon is drones. Despite large-scale airstrikes, Iran retains the ability to launch ballistic missiles and drones at U.S. military bases across the Middle East, Israel, and key Gulf partner countries. Drones have become Iran’s most important asymmetric warfare tool. The FBI previously warned California police that Iran might retaliate with drone attacks on the U.S. West Coast. The FBI warned in late February that “we have information indicating that Iran plans to launch drone attacks from a vessel if the U.S. attacks Iran, especially targeting certain locations in California.”

Iran is over 10,000 kilometers from the California coast. Trump once said he was not worried about Iran-backed forces attacking the U.S. mainland. California Governor Gavin Newsom said Wednesday that state officials are aware of potential drone threats. He stated that drone issues have been a focus, and special task forces have been set up to address these concerns.

In retaliation for large-scale U.S. and Israeli airstrikes, Iran has launched numerous missiles and drones at Israel and Gulf countries with U.S. military facilities. Iran’s Shahed series drones, costing only a few tens of thousands of dollars, can perform long-range strikes. Ukrainian President Zelensky recently said 11 countries have sought assistance, including Iran’s neighbors, European nations, and the U.S.

The U.S. military plans to deploy a new AI-enabled weapon to intercept Iran’s low-cost attack drones. Compared to intercept missiles, production costs could be reduced to about one-quarter. Iran and the U.S. are deploying a small drone called “Merops,” capable of identifying enemy attack drones and approaching targets. When about 1.6 km away, the drone uses AI to lock onto the target and explode at close range to shoot it down.

Reports indicate Iran has laid about a dozen mines in the Strait of Hormuz. If Iran mines the strait, it would severely impact energy exports. This strategy was used extensively during the Iran-Iraq “Tanker War” in the 1980s, when the U.S. dispatched escort fleets to ensure safe shipping. During the 1991 Gulf War, Iraq laid 1,300 mines, damaging two U.S. Navy ships, including the cruiser USS Princeton. It took the U.S. two years to clear the mines in northern Persian Gulf waters.

On March 11, Trump announced that the U.S. had destroyed “28 Iranian mine-laying ships,” calling Israel and U.S. actions against Iran a “short-range operation” that has exceeded expectations. However, so far, the U.S. Navy has not provided escort services for commercial ships. Previously, French President Macron said he had not confirmed with intelligence agencies or French intelligence that Iran was using mines in the Strait of Hormuz, and believed that if Iran used mines, it would be a major decision. Analysts estimate Iran may have 5,000 to 6,000 mines, especially floating mines that are difficult to intercept.

Security experts generally believe Iran’s threats to shipping mainly come from asymmetric means, including anti-ship missiles, drones, fast boat swarms, explosive unmanned boats, and mines.

The Irreplaceable Strait of Hormuz

Even though some within the Trump administration have tried to assure the public that the U.S. will not get involved in another long-term Middle East war, Iran is not an ordinary regional country. It is one of the most dangerous geopolitical nodes in the global energy and shipping system. Iran’s uniqueness lies not only in its missile, drone, Revolutionary Guard, and proxy networks across the Middle East but also in its position at the choke point of the Strait of Hormuz, the world’s energy artery.

The Strait of Hormuz is a critical global shipping route. Before the conflict, about 138 ships passed through daily. The narrowest point is about 34 km, between Iran and Oman, handling roughly 20 million barrels of oil and a fifth of global liquefied natural gas daily. During regional conflicts, it often becomes a highly strategic target.

Currently, the strait is effectively blocked, causing oil prices to break above $100 per barrel for the first time since the Russia-Ukraine conflict began in 2022.

After the U.S.-Israel strikes on February 28, the strait’s navigation has attracted worldwide attention, affecting global nerves. Venezuela can influence regional politics, but Iran, controlling the core vulnerability of global energy and shipping, is the key. It exemplifies a “narrow waterway systemic bottleneck”: normally highly efficient, but in conflict, even without complete closure, harassment, attacks, delays, and insurance premiums can create near “semi-blockade” effects on the market.

The area around the Strait of Hormuz hosts dense U.S. military bases, affecting Gulf oil exports, Israel’s strategic concerns, U.S. allies’ coordination costs, and global financial market fears of supply disruptions.

The U.S.-Israel war against Iran has severely disrupted shipping through the Strait of Hormuz, blocking about 20% of global oil and large LNG supplies. Many analysts told Caijing that the disruption could persist, and countries with strategic oil reserves might take action and release reserves. Unless signs of de-escalation appear quickly, oil prices are expected to rise sharply. On March 12, during Asian trading hours, U.S. crude oil futures rose to around $95.25 per barrel, up about 9.2% intraday.

On March 9, Bloomberg’s ship tracking data showed the strait had been nearly stagnant for seven days, with only one Iran-related bulk carrier leaving the Persian Gulf in the past 24 hours, and no ships entering from the opposite direction. The U.S. military claimed to have destroyed multiple Iranian Navy vessels, including 16 minesweepers, near the strait on March 10. Unverified videos posted on social media showed attacks on Iranian minesweepers, mostly at anchor.

Iran has long threatened to mine the strait if attacked militarily. Research firm Kpler reports that many refineries in the region have halted or reduced production, partly due to damage. This reduces the capacity to convert crude into fuels like gasoline, diesel, and jet fuel. Since the conflict began, only a few ships have successfully passed; others have been hit or burned. UK Maritime Trade Operations (UKMTO) reports 17 ships attacked in the Persian Gulf.

Shipping through the Strait of Hormuz is nearly paralyzed. Despite Trump’s repeated public statements that the U.S. is ready to escort ships, the Navy has yet to fulfill this promise, deepening the crisis. The G7 held an emergency virtual summit to coordinate responses. French President Macron called for G7 members to work together to restore navigation in the strait. Meanwhile, 32 countries of the International Energy Agency agreed to release 400 million barrels of strategic reserves to ease global supply pressures.

Beyond political statements, the actual navigation situation remains dire. Sources revealed on the 10th that since the outbreak of the U.S.-Israel-Iran conflict, ships near the strait have requested U.S. military escort almost daily but have been refused due to high risks. This starkly contrasts with Trump’s repeated claims that “the U.S. is always ready to escort.” Analysts suggest that even if escort plans are implemented, the most optimistic scenario would see less than 10% of normal daily throughput, and the global energy supply chain will face short-term pressure.

Oil prices are highly volatile amid U.S.-Iran tensions. On March 9, panic buying pushed Brent crude to nearly $120 per barrel, a four-year high; then, as Trump signaled that “the war will end soon,” prices quickly retreated. Market concerns over supply disruptions remain. JPMorgan estimates that if the strait remains blocked for two weeks, Gulf oil exports could decrease by about 3.8 million barrels per day, over 3% of global output.

While the Strait of Hormuz is the most critical “oil and gas choke point,” it is not the only route. Gulf countries have built alternative infrastructure over the years, creating an emergency rerouting network. They can send some crude directly to the Red Sea or Oman Gulf for loading, reducing the “total shutdown” scenario to manageable “congestion, delays, and premiums.”

However, these pipelines do not fully replace the Strait of Hormuz. The real bottleneck is not just the pipelines but also port storage, vessel turnaround capacity, insurance, and financial settlement capabilities. In a crisis, nominal capacity quickly becomes much lower “effective export capacity.”

The global daily oil consumption is about 100 million barrels. Jorge Leon, senior vice president at Credit Suisse and head of geopolitical analysis, said: “Alternative infrastructure in the Middle East can bypass the Strait of Hormuz, but the net effect is still a significant loss of oil supply—about 8 to 10 million barrels per day.”

Saudi Arabia’s East-West Petroline, 746 miles long, starts at Abqaiq and crosses Saudi Arabia to deliver crude to the Red Sea. If Saudi Arabia relies on the Red Sea route, it depends more on the security of Red Sea-Mandeb Strait shipping. The UAE has a typical rerouting option, sending crude from Abu Dhabi’s onshore processing and export points directly to Fujairah on the Oman Gulf coast, outside the Strait of Hormuz. Using Fujairah makes the port and offshore waters more congested and vulnerable to market panic.

In Iraq, the northern export pipeline through Ceyhan, Turkey, offers a strategic bypass of the Persian Gulf. Recent reports indicate some resumption and renewal of exports via this route. However, its reliability depends heavily on political stability among Iraq, the Kurdistan Region, and Turkey. During geopolitical shocks, this route is often politicized and less dependable.

Ali Vaez, director of the Iran project at the International Crisis Group, said that Iran can exert pressure by “raising insurance costs and global energy prices” to influence the U.S. and Gulf oil allies.

Global Cost Crisis

Oil prices remain high, and energy price shocks are transmitted globally through four main channels: reducing real incomes via higher energy and food prices; disrupting supply chains and trade flows; tightening financial conditions; and decreasing business and consumer confidence amid uncertainty.

On March 11, the U.S. Bureau of Labor Statistics reported that in February, core CPI (excluding food and energy) rose 0.2% month-on-month, with a year-over-year increase of 2.5%, the lowest in nearly five years. Olu Sonola, head of U.S. economic research at Fitch Ratings, told Caijing that while this CPI report seems reassuring, it may overlook deeper issues. CPI could be underestimated and remains below the Federal Reserve’s preferred measure, the personal consumption expenditures (PCE) inflation index. For policymakers, the real concern is the core PCE, which is still near 3% and could strengthen in the coming months. If the Iran conflict pushes energy prices higher and spreads to core inflation, inflation remains a real risk.

Wall Street investors and the Fed are in unprecedented uncertainty, with market direction increasingly dependent on oil prices and the latest developments in the Strait of Hormuz. Additionally, the ongoing conflict has sparked anti-war sentiment within the U.S. Public opinion polls show that support for military action against Iran is at historic lows, with nearly 60% opposing or strongly opposing Trump’s military measures. Over 50 cities have held protests demanding the Trump administration cease Middle East military interventions.

For President Trump, voter perceptions of the economy will directly influence the midterm elections in November. Trump and the Republicans have recently signaled a desire for quick resolution. Under the pressure of midterms, domestic fatigue, shifting public opinion, and social divisions, Trump has a strong need for a major event to shift national focus. Military action against Iran is not only a foreign policy move but also a gamble to redirect public attention from economic and governance issues to a perceived victory and his leadership. It also helps him unify the party and reinforce his image as a strong leader willing to take risks in a dangerous world.

However, choosing to go to war with Iran is a risky tightrope walk. He needs a victory that boosts morale without significantly raising living costs. Iran, in particular, is the least suitable target for such political manipulation. If the Strait of Hormuz supply issues cause oil prices to keep rising, the war could quickly become a household cost issue, which would be the real determinant of the midterm results.

Gus Faucher, chief economist at PNC Financial Services, told Caijing that the current situation remains highly unstable and uncertain. The most effective way to assess potential economic impacts is to consider the worst-case scenario: a months-long disruption of Strait of Hormuz trade, with Brent crude prices staying above $100 per barrel. If prices remain high for months, as after the Russia-Ukraine conflict, U.S. real GDP growth could slow by about 0.4 percentage points, and overall CPI inflation could rise by about 0.5 percentage points by 2026.

Yellen, former Fed Chair and U.S. Treasury Secretary, recently said that how long the Iran conflict affects oil markets will determine how much U.S. economic growth is impacted and how inflation pressures evolve. This could push the Fed into a “stagflation dilemma”: lowering interest rates to stimulate growth would worsen inflation, while tightening to control prices would hinder economic recovery. Markets are pricing in a “higher for longer” rate path.

This shock differs from the energy price surge after Russia-Ukraine in 2022: the current economic conditions are weaker, with reduced private sector transfers, pent-up demand already released, and slower labor income growth (around 1% in 2025). This makes the global economy more vulnerable to “stagflation”—persistent inflation combined with sluggish growth. Additionally, war-related military spending, ammunition consumption, navy escort costs, and energy subsidies, along with high oil prices, will push up inflationary expenditures, further expanding U.S. fiscal deficits. The deficit could increase by $200-400 billion in fiscal 2026. U.S. Treasury yields are rising overall, with increased risk premiums at the long end. If the Fed maintains high interest rates, debt service costs will rise, credit ratings could be at risk, and short-term safe-haven demand for Treasuries may decline, leading to continued selling.

Rising oil prices are rapidly transforming this regional military conflict into a systemic shock to global inflation and economic growth. Trump’s past tendency to issue tough policies first and then retreat under pressure—typical “TACO” moves—has somewhat weakened market confidence in his deterrence. As spillover effects expand quickly, the situation is no longer a short-term disturbance that can be easily soothed by policy tweaks; it is creating a chain reaction at the supply level. Trump has made Iran aware of his price floor—namely, that energy prices will keep soaring.

Energy shocks are already propagating along the energy trade chain to neighboring Middle Eastern countries, Asia-Pacific, and Europe. Most Asian energy imports come from the Middle East, and few regions are as sensitive to reductions in Middle Eastern oil and gas supplies as Asia. As oil prices exceed $100 per barrel, governments are forced to take increasingly extreme measures—protecting consumers from soaring prices and restricting energy use to prevent shortages amid this seemingly endless conflict.

For oil-producing countries in the Middle East, the issues are not just price volatility but whether ships can be shipped on time, insurance and shipping costs can be borne, and export cash flows can be maintained. Any disruption to key routes, even temporary delays, immediately cuts into their core fiscal revenues, putting enormous pressure on already heavily oil-dependent fiscal systems. For importing countries, the risk shifts from “price increases” to “physical shortages”—markets no longer just worry about high prices but about not being able to buy enough oil.

Disruptions in oil supply impact the real economy not just upstream but through refining and downstream sectors, amplifying effects across industries and consumption. Refineries, squeezed by raw material shortages and rising procurement costs, are forced to cut capacity, leading to declines in refined products, chemicals, jet fuels, and other downstream supplies. This results in a re-pricing of the entire industrial operation: higher logistics costs, increased costs for manufacturing inputs, and mounting pressures on agriculture and transportation sectors, ultimately raising broader consumer prices. This oil price shock is not just a sectoral fluctuation but an evolution toward broader input-driven inflation.

More dangerously, when absolute prices stay high, the economy may gradually shift from “cost-push inflation” to “stagflation”—with persistent inflation pushing up prices while growth stalls. Rising energy prices continue to fuel inflation, forcing central banks to tighten monetary policy, which further suppresses demand. Meanwhile, corporate profits and household purchasing power are eroded by high oil prices, leading to negative feedback on demand. Companies cut investments, households reduce discretionary spending, and industrial activity slows—prices keep rising, but growth declines. The most feared scenario is a “stagflation” trap where inflation remains high while demand weakens, sharply narrowing policy options and pushing the global economy closer to stagflation.

Because of this, the nature of this conflict is no longer just a regional geopolitical confrontation but a global risk event driven by high oil prices, supply disruptions, fiscal deterioration, inflation spillovers, and slowing growth. When the conflict threatens energy security for major buyers, fiscal stability for oil producers, and the normal functioning of global trade, external intervention becomes more likely and necessary.

Editor | Yang Minghui

Cover image | Visual China