Wars are usually measured on maps. Economists begin with choke-points. The war with Iran has turned the Strait of Hormuz into the world economy’s pressure valve. The Strait of Hormuz is the pathway to nearly 15m barrels a day of crude oil, and another 4.5 million barrels of refined fuels. Since the start of the conflict, it has been marred by the disruption, shattering the International Energy Agency’s expectation of an oil surplus in 2026. Brent crude, which the EIA had forecast would average just $58 a barrel this year, was trading at $93.60 on March 6, and Barclays says it could hit $120 if the disruption drags on.
That matters because Hormuz is not a local bottleneck. It is a global one. The EIA reckons that flows through the strait in 2024 and early 2025 accounted for more than a quarter of global seaborne oil trade, about a fifth of world oil and petroleum-product consumption, and around a fifth of global LNG trade. Most of that exposure sits in Asia: 84% of the crude and condensate and 83% of the LNG moving through Hormuz went there. The immediate damage is therefore not just higher petrol prices, but also costlier freight, disrupted fuel supplies, and another inflation scare for countries that thought the energy crisis of 2022 was history. Governments are now discussing naval escorts, and America is offering up to $20bn in reinsurance to coax shipping back into Gulf waters.
Markets, for now, are treating this as a vicious short-run shock rather than a permanent remaking of the energy system. As of March 7, 2026, the term structure of Brent crude oil is downward-sloping, with future prices expected to be 92.26 in May but 79.86 in August. Traders are pricing a logistical seizure, not yet a structural famine. Central bankers are less relaxed. The European Central Bank (ECB) policymakers fear a fresh energy shock could spill into broader inflation. At the same time, the International Monetary Fund (IMF) has warned that the global impact will depend on the duration of the conflict, the damage to infrastructure, and whether higher energy costs persist long enough to affect expectations. Even the ECB’s own sensitivity work suggests that a permanent 14% rise in oil and gas prices would raise inflation by up to 0.5 percentage points while trimming growth.
Iran itself entered the war already limping. The World Bank’s latest Iran Economic Monitor expects growth to slow to an annual average of 2.8% over 2024/25-2026/27, as sanctions, energy shortages, weak investment, and geopolitical tensions bite. Inflation in 2023/24 averaged 40.7%. The country still sells oil, but under constraint: the EIA says sanctions continue to cap production and have pushed exports heavily towards China. In other words, Iran was not a thriving petro-state interrupted by war. It was a sanctions-bound economy with chronic inflation and narrow room for manoeuvre. War adds destruction to distortion.
History offers one comforting lesson and one grim one. The first comes from 1990-91. Before Iraq invaded Kuwait, Brent was about $15 a barrel in early July 1990. By late September, it had jumped above $41. Yet once coalition victory looked likely, the war premium melted with startling speed. EIA data show Brent falling from $30.28 on January 16, 1991, to $21.10 on January 17 and $19.10 on January 18. Kuwait’s oil sector then recovered faster than many feared, with production back to 1.5m barrels a day by the end of 1992 and pre-war capacity restored in 1993. When physical damage is limited and restoration is credible, oil shocks can reverse almost as fast as they arrive.
The second lesson comes from Iraq in 2003. Again, the immediate war premium faded quickly. EIA data show Brent falling from around $30-35 in mid-March to $25.59 on March 21, then hovering in the mid-20s. But cheap oil did not last. By 2004, Brent was climbing again, and Iraq proved far from a simple reconstruction story. The World Bank later observed that Iraq’s oil sector was fiscally dominant but generated little employment, accounting for almost half of GDP and almost all exports, yet only about 1% of jobs. Stronger output did not translate into broad-based prosperity. The moral is plain: ending a war is easier than building an order.
Academic work helps explain why markets are jumpy but not yet apocalyptic. James Hamilton’s 2010 research finds that major oil shocks have repeatedly preceded economic slowdowns. Yet newer work by Lutz Kilian, Michael Plante, and Alexander Richter argues that geopolitical oil-price risk is not, in general, a major driver of business cycles; even a very large hypothetical supply disaster would need a steep rise in perceived disaster probability to generate a serious recession. That fits the present pattern rather well. The world economy is not doomed by every Gulf panic, but neither is it immune when a temporary disruption begins to look like a durable political fracture.
That brings Iran to its fork in the road. On one path, the Islamic Republic falls, and a successor regime seeks reconciliation with the West, sanctions relief, and, in time, democratic normalisation. The transition would be disorderly. Revolutions tend to expose rotten banks, empty coffers, and subsidised fantasies before they produce reform, but the medium-term upside could be large. A World Bank simulation found that lifting Iran’s economic sanctions would raise its per capita welfare by 3.7% and lower global oil prices by about 13%, largely by restoring Iranian supply and reconnecting trade and finance. The EIA says Iran could raise crude output to 3.8m barrels a day after sanctions are lifted. And the broader political-economy literature is encouraging: Acemoglu and co-authors find that democratisation raises GDP per head by about 20% in the long run. A democratic Iran would not instantly become a model economy. But it could become a normal one, which would be an improvement.
The other path is uglier and, for now, more plausible. The regime survives. Sanctions stay. Iran remains a discounted oil exporter with high inflation, weak investment, and growing dependence on shadow trade. The World Bank’s baseline already points to mediocre growth and persistent macroeconomic strain. A 2025 research by Farzanegan & Habibi finds that sanctions reduced the size of Iran’s middle class by roughly 12 to 17 percentage points each year between 2012 and 2019. That matters because the middle class is not just a statistical category. It is the social ballast for reform, enterprise, and moderation.
So the real economic question is not whether oil spikes this week. It is whether this war ends like 1991, with a sharp but reversible panic, or more like post-2003 Iraq, when the first sigh of relief merely opened a longer era of disappointment. Markets can price missiles. They are much worse at pricing institutions. And in this war, institutions, not explosives, will decide whether the bill is counted in quarters or in decades.