Events in the Middle East are moving quickly, and the war may soon pose a danger to the global economy.

Oil markets were closed over the weekend, so analysts used activity in crypto markets as a proxy for investor sentiment. Based on the relative calm they found — Bitcoin down 5% in minutes but eventually stabilizing at $60,000 — they concluded that this war would probably be another tempest in a teapot. That is, a brief spike in oil prices to be followed by a return of calm. After Iran’s Supreme Leader, Ayatollah Khamenei, was killed and Iranians both at home and abroad were seen celebrating in the streets, some analysts went so far as to predict a stock market rally on Monday.

No such rally has occurred. European stock markets slid at opening this morning, while Brent crude soared to $82 per barrel before coming down slightly to $80 per barrel.

Over the weekend, Iran’s retaliatory strikes hit locations in Qatar, UAE, Bahrain and Israel, while oil tankers were targeted in the Strait of Hormuz. Even before Iran began striking ships in the region, insurers told companies they would not provide coverage, bringing shipping to a halt. Meanwhile, Iran’s widening the conflict to non-combatant states in the region has resulted in the closure of many airports. As of Monday morning, there were reports of US fighter jets downed in Kuwait and a UK military base in Cyprus being hit by a drone.

Flight backlogs are thus accumulating. As a result, we face a version of what happened in the early stages of the pandemic, when all shipping and flying stopped. While in this case the shutdown is confined to the Middle East, the fact that the region has become such an important commercial and transportation hub is making the impact global. Already, prices on products and services for which the Middle East occupies a significant place in supply chains — from aluminum and fertilizer to shipping costs — have begun rising.

Unless the war ends quickly, therefore, we may face a long period of higher prices due to shortages and delays. Given how unprepared most investors are for such a scenario, the danger is that they overcompensate at some point and sell sharply. Considering the leverage in some parts of the market, notably private equity and crypto, the risk of chain reactions can’t be ruled out.

The least damaging turn of events would be that Iran’s offensive peters out, stability returns, and supply chains resume functioning. Even then, though, the oil price will probably remain higher than it finished last year and supply shortages may add to inflationary pressures, which in turn could slow rate cuts by central banks — notably the Federal Reserve. All this will add a headwind to economic growth when the world economy is still struggling to recover from the pandemic recession. With China’s economy slowing, growth weak in most G7 countries, and the US’s GDP report for the last quarter of 2025 coming in much weaker than expected, the world economy is already looking fragile.

In the worst case, the war persists, the oil price spikes above $100 a barrel, and a major inflationary shock hits the world economy. A swift Iranian capitulation could forestall that — but the longer the fighting continues, the less plausible such scenarios look.

While it is difficult to map out the consequences of the weekend’s military action, we will likely be able to predict the wider trends in the next few days. If the Iranian regime is able to control the streets while maintaining the scale of its attacks, the economic repercussions will start to be felt across the world. If that situation endures well into the next week, market temperatures will rise. Oil opened this week up over 10%, which still indicates relative confidence this war will be brief or contained. But if the conflict widens or lengthens and the price rises again, there may come a serious tipping point.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

jarapley

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