Impact of Middle East Tensions on the Global Economy and Commodity Markets | Chapter 1Middle East Tensions: Effects on the Global Economy and Policy

On February 28, 2026, the United States and Israel launched attacks on Iran, and Iran's retaliation struck bases and energy facilities in the Gulf states. On March 2, the Islamic Revolutionary Guard Corps announced a blockade of the Strait of Hormuz, through which about one-fifth of the world's consumed oil passes.

Even after the leaders of the United States and Iran signed a memorandum toward ending the fighting on June 17, conditions remained uncertain as of July, including the normalization of transit, and exports from the Gulf states were constrained.

The Gulf states account for about 30% of global crude oil production and just under 20% of natural gas production. Restoring damaged facilities may take several years, and market stabilization through expanded LNG supply may also be delayed by at least two years.

The impact was substantial in Asia: Japan's dependence on the Strait of Hormuz exceeded 90%, South Korea's was about 70%, and India and China's were below 50%. Europe and the United States had more diversified crude oil suppliers, while Europe had comparatively strengthened its resilience through expanded renewable energy and lower dependence on fossil fuels.

Rising crude oil prices spread to jet fuel, natural gas, and fertilizer. From February 27 to March 31, natural gas rose 59.0%, jet fuel 107.4%, and fertilizer 50.0%. One estimate indicates that if fertilizer prices rise by nearly 50%, international agricultural commodity prices will rise by 4% in 2026 and 8% in 2027, increasing the food burden more heavily for lower-income groups.

In the United States, consumer price inflation rose into the 4% range through higher gasoline prices and airfares. In the euro area, consumer price inflation reached 3.2%, but did not rise as sharply as during the 2022 crisis. In China, weak domestic demand and the transition to electric vehicles contained the impact of higher fuel prices on households.

In manufacturing, rising procurement costs outpaced selling prices, pressuring corporate earnings. In the Gulf states, Saudi Arabia's industrial production fell 15.8% year on year in March and goods exports fell 22.7%, while real GDP growth slowed to 3.0% in the first quarter of 2026.

In Asia, crude oil imports declined: China fell by about 30% from its five-year average, South Korea by about 25%, and India by about 30% from its four-year average. Flight cancellations and higher fares weighed on logistics and tourism, and Thailand's total number of overseas visitors began declining in April.

Countries combined supply security with demand restraint. On March 11, 32 IEA member countries agreed to a coordinated release of more than 400 million barrels of oil stockpiles, the largest ever. By May 8, they had released 90 million barrels from government stockpiles and 74 million barrels from private stockpiles, for a total of 164 million barrels. Asian countries diversified procurement sources toward Russia, the United States, Africa, Oman, and elsewhere.

As of July, Japan indicated that alternative procurement not passing through the Strait of Hormuz would secure about 100% of the volume in an average month of the previous year. South Korea announced an agreement to procure a total of 273 million barrels from four countries by year-end, equivalent to more than three months of normal consumption.

For demand restraint, IEA data show that awareness campaigns were implemented in 40 countries, transport restrictions in 24, tax cuts in 55, subsidies in 32, and price controls in 23. South Korea announced 12 energy-saving guidelines on March 24, implemented a five-day rotation system for government vehicles from March 25, and strengthened it to a two-day rotation system on April 8. On July 1, it lowered the alert level and ended the two-day rotation system for government vehicles.

As fiscal room declined, the European Commission indicated that, for 2026 to 2028, spending to reduce dependence on imported fossil fuels could be excluded from fiscal rules up to 0.3% of annual GDP and 0.6% of cumulative GDP over three years. France adopted targeted support for low-income households and others, distributing energy vouchers to a total of 4.5 million households and announcing about 70 million euros in support for industry.

In monetary policy, the ECB raised the deposit facility rate to 2.25% in June 2026. The Federal Reserve held its policy rate unchanged, but its median outlook for the end of 2026 shifted from one rate cut to 0.5 rate hikes. The Bank of England held rates at 3.75%, marking four consecutive meetings without a change since February.

In December 2025, the Federal Reserve ended quantitative tightening, which had continued for about three and a half years, and began the RMPs policy of purchasing short-term Treasury securities to maintain reserve balances. At the June 2026 FOMC meeting, it discontinued forward guidance and established task forces in five areas: communications, the balance sheet, data, productivity and employment, and the inflation framework.

Since 2024, the People's Bank of China has shifted to a framework in which the seven-day reverse repo rate serves as the effective main policy rate. The government work report to the National People's Congress in March 2026 stated that China would maintain a moderately accommodative monetary policy, targeting real GDP growth of 4.5% to 5%, more than 12 million new urban jobs, CPI inflation of around 2%, a fiscal deficit of around 4% of GDP, and a local special bond issuance quota of 4.4 trillion yuan.

The focus ahead is the restoration of the Strait of Hormuz and Gulf facilities, second-round effects of higher energy prices on prices and wages, support design under limited fiscal room, and interest-rate and quantitative-policy management by major central banks. While AI-related investment supports the economy in the United States and parts of Asia, the downward pressure from high energy prices is likely to be relatively more apparent in Europe, where clear growth drivers are scarce.