Energy shock from Iran war exposes vulnerable economies

London — A prolonged conflict involving Iran risks triggering a severe global energy crisis, with some major economies more exposed than others due to their reliance on imported fuel, industrial structure and limited fiscal capacity to absorb rising costs.

Recent attacks on oil and gas infrastructure have already driven up prices, raising concerns about inflation, trade disruptions and broader economic slowdown across both advanced and emerging markets.

Across Europe, memories of the economic fallout from the Russia-Ukraine war are shaping concerns about a fresh energy shock.

Germany, with its industry-heavy economy, is particularly exposed to higher energy costs. Although manufacturing activity has shown signs of stabilisation after a prolonged downturn, rising input costs and weaker global demand could weigh on exports. While Berlin has introduced stimulus measures, fiscal constraints may limit further support.

Italy faces similar vulnerabilities, given its large manufacturing base and relatively high dependence on oil and gas in its energy mix.In United Kingdom, electricity prices are closely tied to gas costs, which have risen sharply since the conflict began.

While a price cap may soften the immediate impact on households, economists warn it could lead to prolonged high borrowing costs and strain public finances.

Japan remains highly vulnerable due to its reliance on imported energy, sourcing around 95% of its oil from the Middle East. Nearly 90% of these supplies pass through the Strait of Hormuz, making supply disruptions a critical risk.

The impact is compounded by a weak yen, which increases the cost of imports and adds to inflationary pressures affecting food and household goods.

In the Gulf, the conflict is expected to have a direct economic impact. While higher oil prices would typically boost revenues, disruptions to shipping routes could offset gains if exports are constrained.

Countries such as Kuwait, Qatar and Bahrain rely heavily on the uninterrupted flow of hydrocarbons through the Strait of Hormuz.

Any sustained blockage could hinder their ability to access global markets.The conflict could also affect remittance flows from expatriate workers, a key source of income for many households in the region.

Among large emerging economies, India is particularly exposed. It imports about 90% of its crude oil and nearly half of its liquefied petroleum gas, with a significant share transported via the Strait of Hormuz.

Higher energy prices could widen India’s trade deficit, fuel inflation and complicate monetary policy, especially if global financial conditions tighten in response to the crisis.

As energy markets remain volatile, the extent of the economic impact will depend on the duration of the conflict and the degree of disruption to global supply chains.