Escalation in Iran: These are the most important scenarios for the global economy

Following the United States' military strike, economic escalation has so far eluded the US. Although the US bombed three Iranian nuclear facilities overnight into Sunday, financial markets nevertheless reacted cautiously on Monday.

The price of oil is the most in focus. It has risen by around 18 percent since the start of the war between Israel and Iran. This increase eased somewhat on Monday. A barrel of Brent crude was trading at around $77 in the afternoon. However, with his decision to enter the war on Israel's side, Donald Trump has caused additional nervousness in the financial markets.

How Iran will react remains unclear. The regime in Tehran has announced retaliatory measures against the American military. The future behavior of oil prices will depend heavily on Iran's response, writes Allianz Global Investors in an assessment. Depending on the outcome, the price of oil could rise to between $80 and $100 per barrel in the short term. On Monday evening, Iran fired missiles at a US military base in Qatar and also fired ballistic missiles at a target in Iraq. According to the Foreign Ministry in Doha, all missiles were intercepted over Qatar.

If this remains the case, Iran will not want to escalate the situation further. Tehran is likely no longer capable of large-scale military strikes anyway. However, Iran could harm the West economically. With the blockade of the Strait of Hormuz, the regime has a powerful means of exerting pressure. The Iranian parliament approved a closure on Sunday. The National Security Council now needs to approve it.

The strait between Iran and Oman is a key transport route for oil and gas. An average of 114 ships transited the strait per day in June 2024. Around one-fifth of global oil production passed through the route last year, equivalent to 20.3 million barrels per day.

The fact that two supertankers turned around before passing through the strait following the American attacks demonstrates the current level of nervousness in the region. According to Bloomberg, the two tankers only resumed their journey through the strait on Monday. Japanese shipping companies have also instructed their ships to keep their time in the Persian Gulf as short as possible.

"A complete blockade of the Strait of Hormuz would certainly be the worst-case scenario," says Patrick Saner, Head of Macro Strategy at Swiss Re. This would lead to a further increase in oil prices, which in turn would drive up inflation in the US. According to Saner, a $10 increase in oil prices could cause US inflation to rise by 20 basis points over the year. At the end of May, inflation was 2.4 percent. This would hit the US at an unfavorable time, as the labor market is already slowly weakening.

Depending on how long the blockade lasts, the effects would also be felt in Switzerland. "Consumers would most likely notice this at the gas pump," says Saner. While the consequences would not be comparable to the oil price shock of the 1970s, margins for refineries that process crude oil had already increased on Friday, before the American attack.

According to the Swiss Re expert, a $10 per barrel increase in crude oil prices would increase gasoline prices by around 0.3 cents per liter. In this case, inflation in Switzerland could rise again. However, according to Saner, the strong franc would largely offset the effect of rising gasoline prices.

However, it seems unlikely that Iran will completely block the Strait of Hormuz. "It's not in Tehran's interest either," says Saner. Such a decision would also have a negative impact on Iranian oil exports.

According to estimates by the US Energy Agency, 84 percent of the crude oil transported through the strait in 2024 went to Asia. China is among the largest buyers. It is considered unlikely that the Iranian regime wants to anger Beijing. The calculation could also be different: By threatening to close the strait, Iran will increase the price of oil. The regime in Tehran benefits more from this than from an actual closure of the Strait of Hormuz, writes energy expert Javier Blas on X.

Temporary disruption maneuvers are also conceivable. According to the UK Marine Monitoring Center (UKMTO), which issues safety advisories for merchant vessels in the region, ships' navigation systems have been disrupted for some time . The UKMTO is receiving increasing reports from tankers that are therefore navigating the dangerous route during daylight rather than at night. Nevertheless, the center notes that no threat to commercial shipping has been identified on the ground so far.

There are hardly any alternatives to the Strait of Hormuz. While there are a few pipelines in the region, their capacity is insufficient to replace the route. The viability of other sea routes also depends on the behavior of Iran's allies. The Houthis in Yemen announced on Sunday that they would attack cargo ships in the Red Sea. If the situation escalates, the freighters will have to take longer routes, which is likely to drive up costs and thus global inflation. However, it will take some time before consumers also feel the impact due to potential disruptions in supply chains.

Drastic economic consequences are not inevitable. Samy Chaar, chief economist at Lombard Odier, expects the American attacks to have limited impact. He writes that crude oil supplies and transportation routes would have to be massively disrupted to have a lasting effect. If the Israeli attacks on Iranian oil infrastructure do not disrupt oil production, the rating agency S&P Global estimates that supply on the global oil market will be sufficient for this year and next .

Demand for 2025 is at its lowest level since 2001, apart from the 2008/09 economic crisis and the pandemic. According to S&P Global, the low demand, combined with OPEC+'s decision to increase oil production, even means there is an oversupply in the market.