More than three weeks have passed since the Middle East once again became a major destabilizing factor for the global economy, said Nemanja Plotan.
“From the moment Iran closed the Strait of Hormuz—an artery through which one-fifth of the world’s oil and gas flows—this is no longer just a military conflict, but an economic mine pushing the global economy toward stagflation,” Plotan stated in his column.
While inflation has become a major concern, especially among younger generations due to rising living costs, it is not inherently dangerous as long as economic growth can keep pace. However, stagflation—a combination of rising prices and stagnant growth—poses a serious challenge for central banks, as traditional monetary tools lose effectiveness.
Plotan warns that a prolonged conflict in the Middle East could push the global economy into a scenario similar to the 1970s oil crisis.
In October 1973, Arab oil-producing countries imposed an embargo on the United States and its allies during the Yom Kippur War, causing fuel prices to surge. U.S. President Richard Nixon introduced fuel rationing, while Europe banned Sunday driving and Japan declared a state of emergency.
At that time, the embargo affected only about 7% of global oil consumption. Today, nearly 20% of global supply is at risk, and the disruption comes from a conflict with no clear end in sight. Even if the Strait of Hormuz reopens, oil is unlikely to return quickly or cheaply.
This conflict could trigger a lasting inflationary cycle, with rising costs of diesel, fertilizers, transport, and food spreading across the global economy.
Warnings are already emerging. Kristalina Georgieva has cautioned that a prolonged war could fuel inflation that tests global resilience. Forecasts suggest inflation could exceed 4% in the eurozone, 3% in the U.S., and 2.5% in Japan.
At the same time, recession risks are growing. Eurozone growth could fall to 0.5% in the second half of the year, China below 3%, while global GDP could lose between 0.2% and 0.8% due to rising energy prices.
Despite this, markets are underestimating the risk, assuming the conflict will be short-lived and oil prices will fall to $65 by year-end. However, if the conflict lasts even one to two months longer, projections suggest oil prices could reach $145 per barrel—echoing the oil shocks of 1973 and 1978 that led to stagflation and recession.
Unlike the 1970s, the United States is now more energy independent, and China has diversified part of its supply. However, Europe—already impacted by energy disruptions—faces another major shock.
The Global South, burdened with debt, risks a new debt crisis if central banks raise interest rates instead of lowering them. Monetary policy could again face a dilemma: fighting inflation may suppress growth, while supporting growth may allow inflation to spiral.
In practical terms, Plotan argues that Iran, unable to win militarily against the United States and Israel, is shifting the conflict into the economic sphere—seeking to make the war economically unbearable for its adversaries and the global system.
In recent weeks, Iranian missiles and drones have targeted not only oil terminals but also logistics hubs, power plants, data centers, water systems, tourism, and financial sectors—key pillars of Gulf countries’ economic diversification plans.
The longer the conflict lasts, the more lasting the economic damage: insurance premiums rise, shipping routes become more complex, contracts are disrupted, and investors withdraw.
The credibility of the U.S. security umbrella is also being questioned, as the petrodollar system relies on guarantees of Gulf security. If trust erodes, trillions of dollars could be redirected toward defense and reconstruction.
Countries like Japan and South Korea—heavily dependent on Gulf energy for semiconductor production—may be pushed closer to China if the conflict continues.
Meanwhile, the situation benefits Russia and China. High oil prices strengthen Russia’s state revenues, while Beijing uses the instability to deepen its strategic position and support Iran.
Although Iran may be losing militarily, Plotan concludes that its economic strategy could reshape the global geopolitical landscape, as in realpolitik, great powers do not destroy only armies—but also the economies of those unprepared for crisis.
Source: RTRS
