Some Economic Consequences of the Iran War
Photograph by Nathaniel St. Clair
As the US-Israel war on Iran enters its third week, the outlines of the economic consequences and fallout of the war have begun to emerge. As the war continues—and by most indicators it appears it will for months longer—the War’s negative impact on the US and world economies will deepen further.
What are some of the economic dimensions for the war’s negative consequences?
First and most obvious is the current oil price shock’s effect on inflation. Not just for US prices, but other countries as well. And not just for goods and services but for asset prices (i.e. stocks, bonds, forex, derivatives, gold, silver, etc.).
Another is the long-term disruption of global supply chains and the volume of global trade.
As inflation rises, central banks, led by the US Federal Reserve, will continue to raise interest rates with a corresponding negative impact on the US and other economies, many of which are already nearly stagnant or are beginning to enter recession. Most heavily impacted will be Europe, the Gulf States, and Middle East energy-dependent countries in East Asia like Japan and South Korea.
Another negative impact will be on global money capital flows—both real investment and financial portfolio asset markets (stocks, bonds, forex, derivatives, etc.).
Then there’s the US budget deficit and national debt. The deficit will now approach $2 trillion a year, for the third straight year. That deficit will drive the national debt to exceed $39 trillion by later this spring and possibly $40 trillion by year end.
The Iran war and its costs converge with a host of other forces driving the deficit and the debt into ever greater crisis: Trump’s escalating war spending (including his plan for $400 billion more for just the Pentagon), the current sharply slowing US real economy (that grew at a mere 0.7% rate in fourth quarter 2025), the present collapse of employment and job creation now underway in the US and Trump’s massive 2025 $5 trillion tax cuts benefiting mostly investors and corporations at the expense of US Treasury tax revenues which is estimated to reduce corporate income tax revenues by $77 billion in 2026.
Not least, the war will accelerate the current fiscal crisis of the American Empire. The costs of Empire now exceed $2.2 trillion a year when all categories of ‘defense’ in the US budget are considered, not just the Pentagon and the US Department of Defense—the latter alone which now exceeds $1.1 trillion a year.
Trump’s war in Iran will exacerbate all these negative economic trends, US and global; and the longer the war continues—which by all indicators it will—the worse the negative economic consequences.
Putting some numbers and facts around the above trends, the picture now beginning to appear in terms of economic consequences of the Iran war is as follows:
Oil Price Shock
Throughout 2025 the price of global crude oil remained at around $60 a barrel. It began to rise in late January 2026 and hit $71 just before the war began Saturday, February 28. Prices initially spiked to $118 the following Monday, March 2, but then settled down below $100 the rest of the first week. On March 9 they were still $98. At the start of the second week, Trump tried to talk down the price by saying the war was “over soon”. His Energy Secretary then posted on the department’s website that US warships had begun escorting tankers through the Hormuz Strait. Oil prices quickly fell to $87. But when the facts revealed the war was not about to end in a week, and that there were no escorts, the Energy Secretary quickly took down the fake claim from the department’s website and oil prices rose again. By Thursday, March 12 they were $101. On March 15, $104. On Monday, March 16 the price of benchmark Brent crude oil hit $106. The price of crude oil will fluctuate day to day with events in the war in the short run but steadily rise over time.
At the retail gasoline level in the US, the Trump administration has continued to underreport the price of gasoline at the pump, after two weeks of war, claiming it has risen only 15 cents a gallon. In fact, the average was closer to 70 cents, according to other official estimates, and in regions like California, more than $1.50/gallon.
Strategic Petroleum Reserve Failure
Trump’s major policy response to address the crude oil supply shock has been to announce the release of 172 million barrels from the US Strategic Petroleum Reserve (SPR). After Biden’s SPR release in 2022, the reserve was never restored. Before Trump’s recent announcement, the SPR held only 412 million barrels or about 60% of its total capacity. That’s to be reduced now by another 172 million barrels. Europe, Japan and other countries have also announced inventory releases, for a global total of around 400 million barrels of extra crude supply for the global market. But neither the 172 or 400 million barrels will have much effect on global and US prices. Here’s why:
The shutdown of the Hormuz Strait results in a 20.3 million barrels a day reduction in total global oil supply, which is about 30% of all seaborne crude oil.
At 20.3 million barrels a day, 400 million additional barrels from the US SPR and global reserves provide for roughly 20 days additional supply to offset the closure of the straits. But 20 days assumes that 20 million barrels from the SPR and other inventories are released to the market immediately on day one. That cannot occur. There’s a ‘flow rate’ limit of release from the SPR, which is no more than 2 million barrels a day. That means it will take 200 days—not 20—for the SPR and other sources to reach global oil markets. So global supply is still reduced by 18 million barrels a day due to the Hormuz closure. The SPR release will hardly dent the supply effect of the Hormuz closure and so little to dampen rising global crude prices in the coming weeks. Nor will it affect much the price of US gasoline at the pump, which will also keep rising—as Biden discovered when he released SPR oil back in 2022.
And there are countervailing forces why gasoline at the US retail level will continue to rise. Whenever there’s a jump in crude oil supply—due to SPR release or other causes—US oil companies simply reduce their output accordingly and/or US drilling companies take a number of their drilling rigs temporarily offline. The result is not a net increase in supply of gasoline, even if there’s an excess of crude oil supply from the SPR.
Moreover, US oil companies control the retail price of gasoline at the pump by manipulating refinery output—not by changes in crude supply. They have purposely not built a new refinery in the US in 50 years! As a result, they can turn off the supply spigot at the pump whenever they want by simply reducing refinery output regardless of crude supply changes. That typically occurs after announcing refinery shutdowns for maintenance, repairs, fires or other such excuses. So forget the politicians’ and media talk about the global price of crude. Oil companies control gasoline prices by controlling the bottleneck of oil refinery operations.
As the war drags on—likely now for weeks if not months—the global price of crude may spike much higher than the current $100 a barrel. The Goldman Sachs bank has forecast the price can potentially rise to $200 a barrel, or more. Not coincidentally, the Iranian government has indicated its target is to push the price to $200.
Global Supply Chain Disruption
The closing of the straits is not only disrupting global crude oil supply but other commodities supply as well. 20% of the world’s natural gas supply also ships through the Hormuz Strait. A significant supply of fertilizer, petrochemicals, plastic packaging, and some metals also passes through the strait. Their supply will be disrupted as well, with various price impacts. The supply of fertilizer may especially have an impact on crop production and food prices in emerging markets in Asia and Africa.
There’s also the matter of the disruption of the supply of shipping containers. A significant supply of containers are locked up now in the Persian Gulf. That will have repercussions on the availability of shipping containers worldwide, creating shortages in places and raising container prices.
US Dollar and Gold
The Iran war and rising oil prices will have a significant impact on the value of the US dollar and, in turn, on the price of Gold. The war and its effects came on the wake of the bubble in Gold prices in 2025, which rose from $1900 an ounce to more than $5000 throughout the year. Conversely, 2025 witnessed a 10% devaluation (price decline) of the US dollar. Both assets, the dollar and gold, have surged as the War erupted, as investors seek safety havens. The gold price surge will now continue. The US dollar recovery will not.
The dollar will resume its decline eventually as demand for dollars to buy oil declines, as 20% of the global supply of oil is taken offline. Investors will shift asset investing more to Gold, continuing to drive up its price. In turn, rising gold price will further depress the value of the US dollar. Thus, in the longer term, the dollar will devalue further by year’s end while gold will rise further.
To try to accelerate the dollar’s decline, Iran has announced policies to hasten the decline in its Demand and thus the value of the dollar. It has announced it will allow tankers to pass through the strait of Hormuz so long as they carry oil that is bought and sold with the Chinese Yuan.
US Inflation
Economists’ estimates are that the US consumer price level will rise by 1.3% points should the price of crude oil remain around $100/ barrel. The US CPI has hovered in the 2.5%-2.9% range. That means the CPI rises to more than 4.0%. But that’s not the full impact of inflation on the consumer. The CPI (or its cousin US price index the PCE) does not include interest rates, which have already begun to spike, impacting auto loans, mortgages, and credit cards. Nor does it fully reflect prices in other categories of purchases that impact consumer budgets. The 1.3% estimate is for the direct cost on energy expenditures, primarily regular gasoline (note that most US car owners buy premium, but the media likes to quote regular). The CPI won’t fully reflect the coming rise in utilities (gas and electric), transport (airlines, trucking, railroad), and food prices as fertilizer and plastic packaging costs rise with global crude prices. Nor does the estimated 1.3% account for consumers’ inflationary expectations almost certainly to rise as well in the coming months.
Financial Asset Price Volatility
Effects on the US dollar and gold have already been noted. But what about other financial assets like stocks, bonds, derivatives, forex, etc.? The disruption of trade, energy, and money capital flows will likely mean a shift by investors out of certain stocks and bonds and a rise in the cost of derivatives insurance.
More instability in US stock and bond markets is already appearing, and it comes on the wake of a significant correction in February in US financial markets. The S&P 500 and Nasdaq markets have contracted 5-7% since February. The economic uncertainty unleashed by the War will dampen financial asset investment further.
And what about that sector that had driven almost all of the stock price appreciation in 2025—i.e. the tech and AI boom? What will be the impact of $100 or more oil prices on energy costs on the huge investments now underway in Artificial Intelligence, most of which is targeted for the energy-hungry AI data centers being built out at present? The AI bubble was already showing signs of contraction before the war. Will sustained surging energy prices lead to further AI stock-related instability?
While some asset prices will accelerate further due to the War, others may deflate due to the same. That includes certain stocks and bonds as interest rates rise, emerging market currencies, and, of course, the dollar.
Interest Rates
Another direct consequence of the War is the rise of interest rates in the US. Already 10 and 30-year Treasury bonds have begun to rise since the start of the war two weeks ago. They will rise further.
The US Federal Reserve will now be even more reluctant to reduce US short-term rates at its next and subsequent meetings, out of concern for rising inflation on the horizon. The Fed cut rates three times last year. Trump opened a war on the Fed to force it to reduce rates further and faster. He needs big cuts in order to have an effect on a US real economy that is weakening fast. He needs lower rates at least six months before the US November 2026 elections. He’s running out of time. Trump just lost a major court case in which he tried to legally force Fed chair, Powell out of office. Given the inflationary pressures generated by the War, the Fed is now less likely to bow to Trump’s pressure and reduce rates. And the longer the war, the less likely the Fed will reduce rates.
US Real Economy
The US real economy enters the War on particularly shaky ground. As previously noted, real US GDP for the fourth quarter of 2025 was a mere 0.7% and for all of 2025 barely 2%. US job growth for all of 2025 was only 181,000 when 1.2m are needed just to absorb new entrants to the labor force. February’s latest job numbers showed, moreover, a contraction of 92,000 jobs. The US employment sector is already in recession.
Consumer spending has recently also slowed down. That’s 2/3s of US GDP. And the Net exports category of GDP will again worsen due to global trade disruptions. That leaves business investment even more dependent on the AI bubble, as the US government continues to cut social program spending to make way for more war spending.
In short, the war may well push the US economy into a condition of Stagflation—i.e., rising prices amidst declining jobs and slowing GDP.
One should not forget the role that oil price spikes can play in economic recessions. Economists generally overlook the role spiking oil prices played in the 2008-09 Great Recession. It was in the spring-summer of 2008 that global crude oil prices shot up to $147 a barrel—a record level which helped precipitate the great recession that year. The financial crash of 2008 played a major role in causing the recession, but the oil price explosion that occurred in parallel with the financial crash contributed as well. One should therefore not overlook the potential of price shocks in precipitating recessions, whether 2026 or 2008.
Europe, Russia, Asia and Emerging Economies
European economies are in an even worse condition than the US. Already battered by energy costs of US LNG gas and oil six times higher than former Russian natural gas, Europe’s economies have been hovering around stagnation or mild recession, according to official statistics. European political elites have exacerbated the conditions by continuing to divert critical money capital for investment in their own economies to Ukraine instead. Now, the Iranian war effects will exacerbate energy cost inflation and slow growth in Europe even further.
Europe gets much of its oil and most of its natural gas from the Gulf states. With that blocked, it will have to buy more from the US—at likely even higher prices. The rising cost of energy may well push the major economies of Europe—Germany, France, UK—over the recession cliff.
The Gulf states economies are in even worse state than Europe’s. Their main money engine of oil and gas is virtually shut down or damaged. It will take months, perhaps years, to restart production and repair damages. Their economies are clearly already contracting sharply.
Asian countries like South Korea and Japan are heavily dependent on Middle East oil and gas. Japan had created a significant stored reserve. But South Korea had not. That country will almost certainly have to start rationing energy use soon.
Then there are those emerging economies that are heavily dependent on the dollar, having ‘dollarized’ their economies. As interest rates rise, the price of the bonds they have issued or hold will decline sharply. Their currencies will decline and their reserves for purchasing critical imports will dry up. Some will have to borrow more again from the IMF. Others cut social spending. They will import less food due to rising prices and their falling currencies. Serious food shortages may occur in these dollarized emerging market economies.
In contrast, Russia is a big winner economically from the Iran war. The surge in the price of crude from $60 to more than $100 a barrel is estimated to result in $150 million a day in additional revenue for Russia.
China benefits as well. While China imports a significant amount of its total oil imports from Iran, it has thus far not been significantly impacted. Iran has reported it continues to export a significant volume of its oil to China. China has developed alternative global sources for its oil imports and has amassed a reserve of oil that reportedly can last five months. In addition, it can always import more from Russia. Its net assets will rise appreciably with the rising price of gold, which it has been acquiring and storing for years.
Finally, as the war in Iran drags on, there will be a further drift from the use of the dollar to purchase oil and toward alternative currency arrangements now being prepared by the BRICS. The war and its economic dislocations will benefit the BRICS at the expense of the US dollar.
Exodus from the Gulf States
Reports abound of the growing exodus of investors and wealthy local populations from the Gulf states as the war intensifies and Iran continues to bomb their infrastructure and US military bases, from the UAE in the south of the Gulf to Kuwait in the north. As the wealthier population leaves, they take their wealth with them. That means investment projects throughout the region are on hold or even being cancelled. In addition, Western money capital is not entering the region now, and Gulf investors are moving their capital from the region and investing it mostly in Gold and other metals elsewhere. The entire economies of the region are being severely disrupted, in other words, not just the flow of crude oil and natural gas.
US Costs of Empire
A generally overlooked consequence of the Iran war is the effect it will have on an already out-of-control US defense spending and related costs required to maintain the US empire today in general.
The US mainstream media and politicians like the public to think that Pentagon spending represents the total costs of defense in the US budget. That Pentagon spending will now exceed $1 trillion in 2026. But that’s not all the US defense department spends. Its total expenditure is now more than $1.1 trillion. And that doesn’t include other obvious ‘defense’ or ‘war’ expenditures like funding the CIA and intelligence agencies, costs of past wars in veterans benefits, development of nuclear weapons in the Energy Department budget, military aid and assistance to allies, Homeland Security escalating costs, costs for secret new weapons development not indicated in the US budget, and interest payments on the national debt due to defense/war spending’s share of deficits and national debt interest payments.
Nor does the $1.1 trillion authorization for the Pentagon and Defense Dept. include Trump’s 2026 current spending on what’s called ‘Overseas Contingency Operations’ for direct war actions in Venezuela and now Iran. It is estimated that the US has been spending $2 billion a day on the war in Iran. And that probably doesn’t include weapons replacement costs. Deploying three aircraft carrier task forces is not cheap. Committing one-third of US aircraft to the region isn’t either. Nor repairing eventually the damage to the US dozen plus bases in the Gulf and aid for the Gulf states to replace their destroyed air defense systems, the radars of which alone cost $1 billion each.
In short, the tab for the Iran war after 20 days is at least $50 billion in OCO. And if Trump sends in the Marines and tries to have the US Navy escort ships through the Hormuz straits, that tab will rise by tens of billions $US more.
In addition to all that, Trump is calling for an increase of another $400 billion for the Pentagon in the next budget as he obviously plans for more wars.
Conclusions
The longer the war, the greater the costs to the US across multiple dimensions. Moreover, the longer the war, the more likely Iran will ‘win’.
Iran is approaching the war strategically, while the US is doing so tactically. Trump thinks bombing Iran’s infrastructure will force Iranian capitulation. Iran believes if it can keep the Hormuz Strait shut long enough, it can create enough damage to the US and Western economies that Trump will have to ‘declare victory’ regardless of the facts and discontinue the conflict.
Trump started the war in the expectation he could repeat the outcome of Venezuela. His US deep state neocons, US oligarch Zionist campaign contributors, and his friend Netanyahu no doubt convinced him that it was possible—even as senior US military advisors forewarned him it wasn’t.
So now he has a wildcat in a bag and he can’t decide whether to let the cat out or drop the bag and run.
Meanwhile, the US and world economies steadily deteriorate and the November 2026 US elections grow closer and with it, a potential political disaster for his war plans—unless, of course, his plan to somehow overturn or negate the elections proves successful.
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