Iran-Israel War: An economic storm for America and the world

As the war launched by Israel against Iran sets the Middle East ablaze, the global economy teeters on the brink of an unprecedented crisis. Israel’s strikes on Iran’s key infrastructure, and Tehran’s retaliatory responses, have shaken energy markets and sounded alarm bells for the economies of the US, Israel, and the wider world. The Strait of Hormuz—through which 20% of the world’s oil and a quarter of its liquefied natural gas flows—is under threat of closure, and even the mere possibility of such a scenario has driven energy prices to catastrophic levels. For the United States—already burdened with $37 trillion in debt, chronic inflation, and widespread fatigue from foreign entanglements—full-scale involvement in this conflict could spell economic and geopolitical suicide.

Relentless shock to energy markets

Above all, the Iran-Israel war has imperiled global energy markets. The Strait of Hormuz, through which 20 million barrels of oil—one-fifth of the global supply—and a quarter of global LNG pass daily, now faces crisis due to Iranian threats of closure. Israeli attacks on Iranian oil infrastructure, including Kharg Island—responsible for over 90 per cent of Iran’s oil exports—have disrupted global supply. According to Bloomberg, Brent crude prices rose from $72 in early June 2025 to $78 per barrel, and Goldman Sachs analysts warn that the closure of Hormuz could push prices to $150 or even higher.

For the US, such an oil shock would have devastating consequences. Every $10 increase in oil prices raises consumer inflation by 0.5%. If prices hit $130 per barrel, inflation in the US could jump to 5.5 per cent, forcing the Federal Reserve to hike interest rates—an action that could derail the fragile economic recovery. Gasoline prices, currently around $4 per gallon, could surge to $7 or more, placing unbearable pressure on American households already struggling with high living costs. Clear View Energy Partners estimates that such a price spike could add up to $2,500 annually to household fuel expenses. Key sectors like transportation, manufacturing, and agriculture would face rising costs, threatening the 2 per cent economic growth forecast by the IMF for 2025.

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Israel is not immune to this energy shock either. Shutdowns of the Leviathan and Karish gas fields—which supply two-thirds of the country’s gas—have forced Israel to rely on more expensive fuels like coal and fuel oil. This has increased domestic energy costs and halted gas exports to Egypt and Jordan, reducing Israel’s foreign currency earnings.

Global fallout: Inflation, recession, and supply chain collapse

The Iran-Israel war threatens the global economy through rising energy prices, supply chain disruptions, and inflationary pressures. Higher oil prices raise production costs in critical sectors like petrochemicals, plastics, and agriculture, driving up consumer goods prices worldwide. Asian countries such as India, Japan, and South Korea—which are heavily reliant on oil imports—face these shocks with limited reserves and mounting currency pressure. In Europe, which turned to Gulf LNG after Russian gas was cut off, disruption in the Strait of Hormuz could cause energy prices to skyrocket and push already sluggish economies into recession.

Global financial markets are also trembling. After Israel’s initial strikes on June 13, 2025, the U.S. S&P 500 index fell by 2 per cent and Europe’s STOXX 600 dropped by 1.8 per cent. Capital Economics predicts that a broader regional war could cut global growth by 0.4 per cent and increase inflation by 1.5 per cent, pushing the world toward 1970s-style “stagflation.” Escalated attacks by Iranian proxies, such as the Houthis in the Red Sea, have raised maritime insurance costs by up to 30 per cent, disrupting global supply chains. For the US—highly dependent on Asian imports—this means higher prices and shortages of essential goods.

Israel, too, faces a deepening domestic economic crisis. According to Middle East Monitor, the war is costing the country $200 million daily—equal to 5 per cent  of its 2025 GDP. Israeli economist Yaakov Sheinin has warned that a prolonged conflict with Iran could wipe out 20 per cent of Israel’s GDP and push the country into a full-blown financial crisis.

Strategic risks for the United States

Full-scale US involvement in this war carries unprecedented economic and geopolitical risks. With $37 trillion in national debt and a $1.8 trillion annual deficit, the US cannot afford another Middle East war. The Iraq experience—which cost over $2 trillion—shows how such interventions drain national resources. General Douglas Macgregor has warned that defending against Iran’s cheap $20,000 drones with $4 million Patriot missiles would rapidly deplete the US military budget. Moreover, the 40,000 US troops stationed in the Persian Gulf are vulnerable to Iranian missile attacks, risking heavy human and financial losses.

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Geopolitically, American intervention threatens its global alliances. European countries, which support nuclear diplomacy with Iran, are likely to oppose unilateral US military action. China and Russia—both diplomatically aligned with Iran—could exploit the chaos to expand their influence in the Middle East, further weakening America’s global position. Kyle Rodda, a financial markets analyst, told Al Jazeera that a major war could jeopardize the US-China strategic rivalry by diverting American resources into the Middle East.

Domestically, public support for military intervention is low. A YouGov poll in June 2025 showed that a clear majority of Americans oppose involvement in the Iran-Israel war, with only a small minority in favor. Rising gas prices and inflation could fuel public discontent and political instability, especially as the 2026 midterm elections approach.

A war that could break the global economy

The Iran-Israel war is an existential threat to the economies of the US, Israel, and the world. Oil shocks, soaring inflation, and supply chain disruptions are only part of the fallout. For America, entering this war would mean skyrocketing gas prices, economic recession, and a weakened global standing—all while its public and allies oppose such a move. Israel faces devastating financial and economic costs that could cripple its economy. Diplomacy, however difficult, remains the only way to avert this economic storm. The United States must learn from its past mistakes in Iraq and Afghanistan and exercise restraint, paving the way for negotiations. The world is on the edge of a cliff—and only diplomatic wisdom can pull it back from the brink.

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The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.