Israel-Iran tensions and the global economic fallout

As tensions escalate between Israel and Iran, the world is watching with bated breath, and financial markets are bracing for a potential economic shock.

The deployment of additional US troops and advanced anti-missile systems to Israel highlights how serious the situation has become.

Recent unprecedented attacks from Iran and Israel’s potential countermeasures, particularly targeting Iran’s vital oil or nuclear facilities, could set the stage for a global crisis.

One of the most concerning ripple effects? A massive spike in oil prices, potentially reaching $200 per barrel, that could reverberate through the global economy.

The US has this weekend deployed the Terminal High-Altitude Area Defense (THAAD) system to Israel along with about 100 troops to operate it.

This move is a clear sign of Washington’s commitment to shoring up Israeli defenses in the face of increasing threats from Iran.

While not the first time such a defense system has been deployed in the Middle East, the context this time is more volatile. The region is at a boiling point, with concerns that Israel may retaliate by targeting key Iranian infrastructure, particularly its oil and nuclear assets.

Iran has already been accused of launching unprecedented attacks against Israel in recent months, most notably on April 13 and again on October 1.

These incidents have heightened fears of a broader conflict, one that could draw in major powers like the US and disrupt global supply chains, particularly in the oil industry. The deployment of American personnel and defense systems, while designed to prevent further escalation, underscores how close the region may be to a tipping point.

For years, the global oil market has operated on a delicate balance. The slightest disruption in key oil-producing regions can send shockwaves through energy prices.

Iran, as one of the world’s major oil exporters, plays a crucial role in this dynamic. Any attack on its oil infrastructure, whether by Israel or as part of broader hostilities, could cause significant short-term disruptions in the global supply of oil.

Speculation is mounting that Israel, in response to Iran’s aggression, may target Iranian oil or nuclear facilities.

Such an act could send oil prices skyrocketing. Analysts are already predicting that in a worst-case scenario, oil prices could hit $200 per barrel, in my opinion. This would represent a massive increase from current levels and could trigger severe economic consequences globally.

A sharp spike in oil prices would have immediate and far-reaching effects on global inflation.

In 2022, much of the world was grappling with inflation driven by pandemic-induced supply chain issues and the war in Ukraine, which disrupted energy supplies. While inflationary pressures have somewhat eased in recent months, a sudden surge in oil prices would likely reverse this trend.

At $200 per barrel, fuel prices would soar, affecting transportation, manufacturing, and even the cost of everyday goods.

Central banks, many of which have been in the process of reducing interest rates to spur economic growth, would be forced to reconsider their monetary policies.

Instead of easing financial conditions, they may need to hike rates again to combat runaway inflation, which would, in turn, slow economic growth and potentially tip some economies into recession.

For emerging markets, the consequences of such a price surge would be particularly devastating. Many of these economies rely heavily on oil imports and would be severely impacted by both the rising cost of energy and the potential slowdown in global economic activity.

Countries like India, Brazil, and Turkey, which are still recovering from post-pandemic inflation, would face new economic challenges, possibly leading to currency devaluations, higher import costs, and rising national debt levels.

Developed economies, including the U.S. and Europe, would not be immune either. The price of fuel at the pump would spike, increasing the cost of living for millions.

Transportation and logistics costs would rise, feeding into higher prices for goods and services. Sectors like manufacturing and airlines, which are heavily dependent on energy, could see their profit margins squeezed.

The broader economy could face slower growth as businesses and consumers alike cut back on spending to cope with rising costs.

The Geopolitical Domino Effect

The stakes in the Israel-Iran conflict extend far beyond the immediate military considerations. A direct confrontation involving Iranian oil facilities could set off a geopolitical chain reaction.

OPEC and other major oil producers, including Saudi Arabia and Russia, would be forced to make difficult decisions about production levels. While they could try to increase supply to stabilize prices, their ability to do so may be limited by existing commitments and capacity constraints.

At the same time, any further escalation in the Middle East would likely draw in other regional players, potentially leading to wider conflicts.

The involvement of US forces in defending Israel, while crucial for stability, risks inflaming anti-Western sentiments in the region, making an already volatile situation even more precarious.

As Israel and Iran edge closer to a potential confrontation, the economic implications are becoming increasingly clear.

A strike on Iran’s oil facilities could push global oil prices to unprecedented levels, exacerbating inflation and throwing the global economy into turmoil. Governments and central banks worldwide would need to respond swiftly to contain the fallout, but the road ahead would be rocky.

The world is watching closely, and while diplomatic efforts may still avert a crisis, the risks remain high.

For now, the best hope is that cooler heads will prevail, preventing an escalation that could send oil prices—and the global economy—spiraling into chaos.

Nigel Green is deVere CEO and Founder

Also published on Medium.