US and Israeli Military Operation Against Iran: What This Means for the Global Economy

Early Saturday morning, February 28, a joint US-Israeli operation called “Epic Fury” began. After allied strikes aimed at suppressing Iranian air defense systems and eliminating Iran’s leadership and IRGC (Supreme Ayatollah Ali Khamenei, former president Mahmoud Ahmadinejad, and about forty high-ranking officials were killed), the Islamic Republic responded by shelling neighboring countries. In addition to Israel, missiles and drones were launched at Bahrain, Qatar, Kuwait, the UAE, Saudi Arabia, Jordan, and Iraq. Two missiles even targeted Cyprus—thus, for the first time, Iran struck Europe.

The Iranian leadership stated that it was striking exclusively at American bases located in these countries. But judging by the fact that important tourist and logistical civilian sites were hit, the goal was also to “punish” neighbors for their lack of solidarity with the ayatollahs.

Oil Was the First to Burn

The most obvious consequence of the conflict is a rise in oil prices. Over the weekend, oil prices increased modestly—by about 3%. This was partly because major players were not trading at the time, and also because OPEC, at its emergency meeting on Sunday, March 1, increased production quotas by 206,000 barrels per day. Reportedly, Saudi Arabia and Russia were the main advocates for the increase.

Nevertheless, market anxiety is rising. The issue is not a lack of oil: by the end of last year, more than 1 billion barrels of oil had accumulated on tankers around the world, with literally nowhere to go. The problem is that a significant share of oil passes through the Strait of Hormuz—and Iran kept closing and reopening it on Sunday, while tankers passing through the strait were hit, either accidentally or deliberately. By midday Sunday, over 150 tankers had accumulated on both sides of the strait, and insurance companies began to revise policy costs to account for the new risks.

Disrupted supplies and rising shipping costs due to higher insurance prices could mean that, despite a physical surplus of oil at sea, importing countries may face fuel shortages. Countries may also start stockpiling oil in anticipation of a prolonged conflict.

Sri Lanka is already experiencing an oil shortage, after having previously faced protests related to an energy crisis.

Oil traders are holding back for now. The reason is clear: if the conflict ends within a week, as US President Donald Trump promises, there will be no significant oil shortage—but prices could collapse sharply afterwards. If the conflict lasts several weeks, problems will begin and oil prices could jump to $80 per barrel. If it drags on like the Iraq war or longer, even $100 per barrel may not be the limit.

The situation is made worse by the fact that the US—the world’s largest oil supplier—has cut production to a six-month low. Incidentally, not only oil but also 20% of global LNG traffic passes through the Strait of Hormuz. So gas prices are rising too.

Russia has also suffered from Iran’s actions. Iran struck the port of Duqm in Oman, and it’s in this port’s special economic zone that many tankers of the Russian shadow fleet were transferring Russian oil to “clean” vessels.

No One Is Going Anywhere

Not only oil and gas carriers are suffering. Navigation in the Strait of Hormuz is currently hampered by widespread satellite data distortions: on maps, many ships appear to be “sailing” over land. If satellite disruptions continue, the whole region will become unsafe for shipping—yet it is a central hub for global maritime trade, including container ships and other vessels. This will primarily impact China, for which the Middle Eastern route is critically important for supplying goods to Europe.

Tourism has already suffered: Iranian strikes hit iconic buildings in the UAE, the Burj Al Arab (“Sail”) hotel in Dubai, and nearly struck another landmark—the Burj Khalifa, which had to be evacuated. Dubai airport was also affected. Tens of thousands of tourists were stranded in airports and hotels in the affected countries, especially in Dubai, including over 20,000 Russian tourists. In recent years, Dubai has also become home to many wealthy people from around the world—they are now feeling uneasy too.

The Saudi authorities are especially enraged, as Iran struck not only the Prince Sultan Air Base, but also the capital, Riyadh. The Saudis, who have been relatively friendly with Iran in recent years, have invested heavily in developing the country’s tourism potential—and now their investments have literally been burned by Iranian missiles and drones.

Whether the current crisis in the Middle East’s tourism sector will be only a brief shock or not again depends on how long the fighting lasts and how it ends.

Even if the conflict ends quickly, if Iran’s numerous proxies in different countries start terrorist attacks, tourism will have to be forgotten not only by Iran’s neighbors, but probably the entire region.

If there is a threat of attacks on the ground, tourists simply won’t go, and if airlines, fearing air attacks, start flying detour routes, flight times will increase by 2–5 hours depending on the departure point—causing airfares to rise accordingly.

Cruises in this region are also at risk: on Sunday, explosions occurred at Abu Dhabi port near the cruise liner Mein Schiff 4, owned by the German travel group TUI—it ended up trapped in Zayed port due to the conflict.

The real estate sector will also suffer, which in recent years has become a major source of income not only in Dubai, but also in Abu Dhabi, Egypt, Saudi Arabia, and other countries in the region. Ironically, the most prestigious and expensive high-rise buildings have suddenly become the most dangerous—they are easy targets, or could be hit accidentally by a passing drone, and evacuating these buildings in case of fire is considered a challenging task worldwide. Moreover, if such dangers persist, along with the threat of terrorist attacks, developers will have to design additional protection and evacuation systems, which means extra—and significant—costs.

Overall, so far the damage has been minor, but if the conflict drags on, the prospects look alarming. It’s hard to say what motivated the Iranian leadership to intimidate its neighbors—including relatively loyal ones—with such strikes, but there’s little doubt that intimidation was the goal. If the aim was to turn them against the US and force the removal of American bases from their territories, that goal has clearly not been achieved: more and more countries are expressing dissatisfaction with Iran’s actions and, if the strikes continue, Iran may end up fighting all its neighbors.

In this case, the region’s tourism potential will be lost for a long time, logistics routes will have to be rebuilt again, threatening new supply disruptions and price hikes, just as happened during the pandemic. As for how much oil will cost, that’s anyone’s guess.