Geopolitical risk stemming from Iran is shaking the global economic landscape. As energy prices swing sharply, a broad shock is spreading from household prices to national growth rates. Depending on each country's energy self-sufficiency and supply chain structure, the "energy security" report card is showing stark contrasts.
Economists now present two scenarios for the global economy. One is an optimistic view that the war ends early and energy prices normalize by summer; the other is a pessimistic view that supply chain disruptions persist. Goldman Sachs projected that if oil tops $100 per barrel, global economic growth will fall by 0.5 percentage points (P) and inflation will jump by nearly 1 percentage point. The Wall Street Journal (WSJ) analyzed that if the war drags on, Europe and the Middle East will suffer severe damage, while Russia will enjoy unexpected windfall gains.
◇ Europe and the Middle East face inevitable heavy damage
Middle Eastern oil producers are usually classified as beneficiaries of high oil prices, but this time is different. The variable of a Hormuz Strait blockade is blocking export routes and forcing production cuts. Capital Economics warned that if the conflict is prolonged, the Gulf region's economic size could evaporate by up to 15%. Even if the war ends quickly, analysis suggests the Gulf economies could shrink by as much as 2% this year.
WSJ said, "This conflict is also damaging the Gulf's image as a 'stable investment destination,'" adding, "This could weigh on Saudi Arabia's economic reform project 'Vision 2030,' which depends on attracting foreign investment." The tourism industry is also expected to be affected. Tourism research firm Tourism Economics estimated that international visitors to the Middle East this year will decline by up to 27%, wiping out about $56 billion (about 83 trillion won) in tourism revenue.
Europe is also taking a direct hit from rising energy prices. The European Union (EU) relies on imports for about 58% of its energy, leaving it vulnerable as global competition for supplies intensifies. Over the past month, European gas prices have surged more than 50%. Oxford Economics predicted that the impact of higher energy prices on eurozone inflation will be roughly three times larger than in the United States. Still, it is considered a small relief that the probability of returning to the extreme crisis levels of 2022—when natural gas prices hovered around 300 euros per megawatt-hour (MWh)—is low. After Russia's invasion of Ukraine, Europe experienced a severe energy crisis and eurozone inflation topped 10%. Natural gas prices are currently around 50 euros.
◇ U.S. has stronger defenses but inflation challenge remains
The United States has bolstered its resilience to oil shocks over the past decade by expanding shale oil production and transforming into a "net energy exporter." But it has not avoided internal shocks. Since the Iran war, U.S. gasoline prices have risen about 20%, squeezing household consumption capacity. Oxford Economics projected that if oil holds at $80 per barrel, U.S. inflation will rise by 0.2 percentage points and growth will be 0.1 percentage points lower.
◇ Russia and some oil producers secure an unexpected "lifeline"
The biggest beneficiary of the Iran war is Russia. Russian crude, whose outlets were blocked by Western sanctions, is again in high demand due to Middle East supply disruptions. With oil prices far exceeding Russia's fiscal breakeven of $59 per barrel, the Kremlin's war chest is set to swell further. Other oil producers, including Canada and Brazil, also appear likely to gain momentum in economic growth from higher export revenue driven by elevated oil prices.