The Oil Curse: Escalation of Conflict Between Iran and Israel Drives Renewed Fears of Global Economic Shocks

An Iranian oil refinery

By Robert W. Moore III

Conflict between Israel and Iran on April 19 prompted renewed fears of a global economic shock after the former mounted a retaliatory strike against a military base in the central Iranian city of Isfahan, the New York Times reported.

Iran’s efforts to downplay the Israeli attacks drove oil prices down after they spiked to more than three dollars per barrel, with Brent futures listing the price per barrel of crude oil at $86.39, according to Reuters. Still, Iran’s previous strike on Israel on April 13 drove oil prices up to levels not seen since October—roughly $90 per barrel—although prices stabilized as early as April 15, reported the Financial Times. 

Other immediate financial impacts of the prior attack include the sliding of a wide range of U.S. stocks and a six-month peak in equity-market volatility, according to the Financial Times. Yet investors remain primarily focused on the global oil market, which is heavily dependent on the maintenance of an uneasy peace between Iran, Israel, and the Persian Gulf States. According to the Paris-based International Energy Agency (IEA), the conflict between Israel and Iran raises “the risk of increased volatility in oil markets and provides a fresh reminder of the importance of oil security,” CNN cited. Similarly, Helima Croft, head of global commodity strategy at RBC Capital Markets and a former CIA analyst, stated that the “risk to oil [on account of regional escalation] is not insignificant.

According to CNN, experts have increasingly directed their attention toward the Strait of Hormuz, the chokepoint off Iran’s southern coast, through which 25 percent of global maritime petroleum trade flows daily. Iran itself is a member of the Organization of Petroleum Exporting Countries (OPEC). Due to the restrictions established via international sanctions, however, Iran sends most of its oil exports to China. According to IEA data, these exports amount to roughly 1.5% of the global oil supply, and Iran manufactured 3.5 million barrels of crude oil per day in March alone.

Iran is currently facing other economic challenges. In February, inflation was at 40 percent, while the U.S. dollar has gained 15 percent against the Iranian rial in recent weeks. Corruption, much of it tied to the paramilitary Iranian Revolutionary Guard Corps (IRGC), has severely damaged the Iranian economy in recent years, DW reported . The country ranks 149/180 in the Corruption Perception Index produced by Transparency International. These weaknesses hurt Iran’s chances of standing up to Israel in a regional war. As of 2022, its GDP was $413 billion as opposed to Israel’s $525 billion.

The disruption of the Iranian oil flow could force China to search for supplies elsewhere, competing with other countries in a volatile market, CNN reported. Blockage of the Strait of Hormuz would also negatively impact the economies of other OPEC states, such as Saudi Arabia, Kuwait, and the United Arab Emirates. Conversely, such a blockage could boost the share of the global oil market controlled by non-OPEC oil-producing states like the United States, Canada, Brazil, and Guyana. According to the IEA, those four countries are close to meeting the global growth in oil demand for the next two years.