The Iran Wars of 2025–2026 and the Strait of Hormuz: Oil, Shipping and the Gulf Economies

This chapter looks at a chain of conflicts between Iran on one side and Israel and the United States on the other. The chain runs from direct exchanges of fire in 2024, through a 12-day war in June 2025, to a much larger war that began on 28 February 2026 and had not ended by October 2026. Its economic heart is a narrow sea lane: the Strait of Hormuz. Few places show so clearly how a war in one region becomes a price shock for the whole world.

1. Background: how the war began

Iran’s economy has lived with sanctions for decades. A turning point came with the Joint Comprehensive Plan of Action (JCPOA), the nuclear agreement concluded on 14 July 2015. On “Implementation Day”, 16 January 2016, the United States ended sanctions on Iran’s oil and banking sectors and the European Union lifted bans on oil sales and on SWIFT access, the network banks use to send payments^[10]. On 8 May 2018 the United States withdrew from the agreement and reimposed sanctions, even though the International Atomic Energy Agency reported that Iran was complying^[11]. Iran’s oil exports then collapsed, to about 100,000 barrels a day by July 2019^[12].

Exports slowly recovered, mostly through informal sales to China^[13]. In 2025 China took more than 80% of Iran’s shipped oil, averaging 1.4 million barrels a day^[12]. Meanwhile direct military conflict began. On 13 April 2024 Iran launched a barrage of drones at Israel^[14]. After an Iranian missile attack on 1 October 2024, Israel struck Iran on 26 October, hitting missile-fuel production equipment and four S-300 air-defence batteries^[15].

In June 2025 the conflict became open war. Israel began striking Iran on 13 June; by 19 June the fighting was in its seventh day^[16]. On 22 June the United States bombed Iranian nuclear sites, and on 23 June Iran fired missiles at a US base in Qatar^[17]. A ceasefire took effect on 24 June^[18]. In September 2025 Britain, France and Germany triggered the “snapback” of UN sanctions, which returned on 28 September; the rial fell to a record 1.12 million per dollar^[19]. In January 2026 it slid from about 1.4 million to 1.6 million in under a week, a shock that fed nationwide protests^[20].

On 28 February 2026 the United States and Israel launched waves of strikes on Iran. Iranian state television reported that the Supreme Leader, Ayatollah Ali Khamenei, had been killed. Iran’s Revolutionary Guards (IRGC) fired at US bases in the Gulf and at Israel, and moved to close the Strait of Hormuz^[21].

2. Where things stand now

As of October 2026, the war is unresolved. A two-week ceasefire began on 7–8 April 2026, but the first direct US–Iran talks in more than a decade, held in Islamabad, ended without agreement. The United States then blockaded all shipping entering or leaving Iranian ports from 13 April, while saying ships using the strait for other countries’ ports would not be stopped^[22]. A memorandum signed on 17–18 June promised that Iran would reopen the strait, that the blockade would end within 30 days and that US oil sanctions would be waived^[23]. It did not last. By 14 July the interim peace had collapsed, the blockade had restarted and Iran was attacking tankers again^[24].

By 12 October 2026 the US blockade of Iran’s southern ports was still in place. Iran said it would keep disrupting shipping while the blockade continued and that no deal would be made until all seven of its conditions were met. The maritime analytics firm Windward counted 45 ships targeted by Iran in the third quarter of 2026 and at least 15 in the first part of October. Oil now leaves the Gulf partly through a shuttle system in which small vessels carry crude to larger tankers along corridors near Oman’s coast^[26]. The International Energy Agency (IEA) reports that oil flows through the strait recovered to 10.9 million barrels a day in September, roughly half their pre-war level^[2][1].

3. The economy before the war

Iran. Sanctions had already made Iran a high-inflation, low-investment economy. IMF data show growth of 4.1% to 5.3% a year in 2021–2023, slowing to 3.7% in 2024 and shrinking by 0.9% in 2025. Inflation averaged 32.5% in 2024 and 50.6% in 2025^[8]. Measured in US dollars, GDP fell from about $508 billion in 2017 to about $371 billion in 2025, mainly because the rial kept losing value^[8]. The World Bank estimates that real GDP fell 2.7% in the Iranian fiscal year to 20 March 2026^[27]. Before the June 2025 war, Iran exported about 1.7 million barrels of oil a day, according to IranWire^[13].

The Gulf states. The six Gulf Cooperation Council (GCC) states grew by 4.4% in 2025, according to the World Bank^[27]. IMF figures show 2025 growth of 4.6% in Saudi Arabia, 6.2% in the UAE, 1.8% in Qatar, 2.7% in Kuwait, 3.5% in Bahrain and 2.4% in Oman^[8]. Their position differed sharply. Kuwait ran a budget surplus of 24.5% of GDP in 2025, while Bahrain ran a deficit of 13.2% and carried government debt of 144% of GDP^[8].

The strait. In 2024 an average of 20 million barrels of oil a day passed through Hormuz, about 20% of world petroleum consumption. Of the crude, 84% went to Asia, and China, India, Japan and South Korea together took 69%. Only about 2.6 million barrels a day of pipeline capacity was estimated to be available to bypass the strait in a crisis^[1]. About a fifth of world trade in liquefied natural gas (LNG) also passed through, mostly from Qatar, and 83% of it went to Asia^[28].

4. The economic impact: indicator by indicator

4.1 Output and GDP

The 12-day war (June 2025). The first war was short and markets treated it as such. Brent rose to $78.85 on 19 June, its highest since January, then fell 6% to $67.18 when the ceasefire took effect on 24 June^[16][18]. Iran’s oil exports reportedly fell by 94% during the fighting, to about 102,000 barrels a day, according to IranWire^[13]. In Israel, GDP fell at an annual rate of 3.5% in the second quarter and business output by 6.2%, which the Bank of Israel linked to the operation against Iran^[29].

The 2026 war. The second war hit output much harder. The IMF’s October 2026 data project Iran’s economy to shrink by 7.6% in 2026^[8]. The Gulf states, which had been growing, are now forecast to contract sharply. Forecasts were cut again and again as the war dragged on. In April 2026 the IMF expected Saudi Arabia to grow by 3.1% and Qatar to shrink by 8.6%^[30]. In July it cut Saudi growth to 1.7% and forecast a 0.5% contraction for the Middle East and North Africa^[31]. By October it projected contractions of 3.3% for Saudi Arabia and 15.6% for Qatar^[8].

Israel suffered a sharp but short loss of output. GDP shrank at an annualised rate of 3.3% in the first quarter of 2026, as weeks of missile fire closed schools and cut consumer spending^[32]. The IMF cut its 2026 growth forecast for Israel from 4.8% before the war to 3.5%^[33].

4.2 Inflation and the currency

Iran shows how war, sanctions and a falling currency feed inflation. The rial traded at about 1.35 million per dollar at the start of 2026 and reached about 1.72 million after the strikes began. It strengthened to about 1.53 million after the June memorandum, then weakened again^[6]. The Associated Press reported a record low of 1.8 million on 29 April, under the blockade^[20], while Euronews reported a record of 1.9 million^[6].

Iran’s Statistical Centre measured year-on-year inflation of 88.6% in the month to 21 June 2026; the central bank’s figure was 83.1%. Food prices more than doubled, and rural inflation (108.1%) ran above urban inflation (85.2%)^[6]. The IMF projects average inflation of 78.6% in 2026, up from 50.6% in 2025^[8].

Israel faced the opposite problem: its currency strengthened, and the IMF expects only a temporary rise in inflation from energy prices, partly offset by the stronger shekel^[33]. In the Gulf, the UAE raised pump prices by 15.8% to 16.6% for petrol and 11.6% for diesel in October 2026 alone^[34].

4.3 Public finances and debt

For Gulf governments, oil and gas revenue is the main source of income, so a fall in export volumes cuts revenue even when prices rise. The IMF projects that Saudi Arabia’s budget deficit will widen from 5.8% of GDP in 2025 to 6.5% in 2026, and its debt will rise from 31.8% to 35.4% of GDP. Kuwait’s surplus is forecast to shrink from 24.5% to 15.8% of GDP, and its debt to rise from 14.6% to 26.6% of GDP. Bahrain’s debt is projected to reach 162.8% of GDP^[8].

Bahrain shows how a weak fiscal position becomes a crisis in wartime. Oil and aluminium provide more than two-thirds of government revenue, and both exports were blocked. Iranian strikes damaged the Aluminium Bahrain smelter and the largest refinery. In April 2026 the UAE’s central bank agreed a currency swap of up to 20 billion dirhams (about $5.4 billion) over five years^[35].

Iran’s government deficit is projected to widen from 5.3% of GDP in 2025 to 7.1% in 2026^[8]. Its government spokesperson, Fatemeh Mohajerani, put the direct and indirect damage from 40 days of war at $270 billion; the Foundation for Defense of Democracies, a US think tank, estimated damage of about $144 billion, within a range of $50 billion to $300 billion^[36]. These estimates use different methods and should be treated with caution.

In Israel, the Finance Ministry estimated the budget cost of the 2026 Iran war at 35 billion shekels ($11.5 billion), including 22 billion for defence^[37]. The IMF projects the general government deficit at 6.2% of GDP in 2026 and debt at 70.1%^[33].

4.4 Trade and key sectors: oil and gas

Iranian oil. The blockade cut Iran off from its main source of foreign currency. According to the tanker-tracking firm Vortexa, Iran’s crude and condensate exports fell from about 1.9 million barrels a day in March 2026 to 1.34 million in April and about 209,000 in May, the lowest since 2019–2020. Kpler, another tracker, put May exports at 260,000 barrels a day^[4]. China’s imports of Iranian crude fell from a 2025 average of 1.4 million barrels a day to 534,000 in early August, as ships drew down oil stored at sea^[12]. On 20 August the central bank governor, Abdolnaser Hemmati, said: “it is a reality that we are not exporting oil”^[5]. Iran’s oil output fell from 2.72 million barrels a day in July to 1.94 million in September, against capacity of 3.8 million^[38][2].

Gulf oil. In August 2026 more than 10 million barrels a day of Gulf output was shut in, and Saudi production fell to 5.97 million barrels a day, against an implied OPEC+ target of 10.42 million^[38]. Saudi Arabia rerouted crude through its East–West pipeline to Yanbu on the Red Sea, raising exports there from about 1 million to 4.9 million barrels a day^[39]. But the Red Sea is also a war zone. After the Houthis declared a ban on Saudi shipping in July, only one Saudi-linked tanker passed through the Bab el-Mandeb strait^[25], and an attack on the pipeline on 10 September halted exports from Yanbu^[25]. Output recovered in September as more oil moved through the strait: Saudi production rose to 8.30 million barrels a day and Gulf crude exports to 13.9 million, more than 75% of pre-war levels^[2].

Qatar’s LNG. After Israel struck Iran’s South Pars gas field, Iran struck Qatar’s Ras Laffan complex. Two of Qatar’s 14 LNG production lines (“trains”) and one of its two gas-to-liquids plants were damaged. QatarEnergy’s chief executive said about 17% of export capacity was lost, removing 12.8 million tonnes a year for three to five years and about $20 billion a year in revenue. QatarEnergy declared force majeure on some long-term contracts with buyers in Italy, Belgium, South Korea and China; Kuwaiti and Bahraini oil companies also invoked force majeure^[7].

Prices. Brent crude averaged $70.89 a barrel in February 2026, $103.13 in March and $117.29 in April. After the June memorandum it fell to $85.40 in June and $83.76 in July, then rose again to $114.16 in September^[3]. In mid-October the IEA reported North Sea Dated crude at about $134 a barrel and Brent futures at about $107^[2]. Gas prices rose even more in Europe: the World Bank’s European natural gas price rose from $11.24 per million British thermal units in February to $25.42 in September. Japan’s LNG import price, which is mostly set by long-term contracts linked to oil, rose less, from $11.32 to a peak of $15.65 in April^[40].

The shock also hit food. The World Bank’s urea fertiliser price rose from $472 a tonne in February 2026 to $857 in April, before falling back to $408 in September^[40]. Higher fertiliser costs raise farmers’ costs and, later, food prices in importing countries.

4.5 Shipping and insurance

Even ships that were allowed through faced much higher costs. Before the war, war-risk insurance for a tanker cost about 0.25% of the hull value, or about $250,000 for a $100 million ship. In July 2026 the rate was between 3% and 10%, or $3 million to $10 million a voyage^[9]. Kpler counted 41 transits on 7 July, against about 130 a day before the war^[41]. Windward counted 31 ships a day in the last week of September, against 138 before the war. Freight now makes up 25% to 30% of the cost of Gulf crude, against 1% to 3% before the war, and national oil companies have offered discounts of up to $35 a barrel to find buyers^[26].

4.6 Labour market

The IMF projects Iran’s unemployment rate to rise from 7.5% in 2025 to 9.2% in 2026^[8]. Official statements suggest a larger shock. Iran’s deputy labour minister, Gholamhossein Mohammadi, said at least one million jobs had been lost directly, as reported by the Foundation for Defense of Democracies^[36]. The Associated Press, citing the Iranian newspaper Shargh, reported 500 layoffs at one factory in Rasht and 700 at a textile factory in Borujerd since late March^[20]. Iran’s official minimum wage covered only about 37% of the cost of a basic household living basket, according to figures cited by Euronews^[6].

In Israel, the IMF notes that military mobilisation and fewer non-Israeli workers continue to limit labour supply^[33].

4.7 Poverty, human development and human capital

The human cost of war comes first. In the June 2025 war, Iran’s Foundation of Martyrs said at least 1,060 people were killed; the US-based group Human Rights Activists counted 1,190, including 436 civilians^[42]. . On the first day alone, the UAE said 137 missiles and 209 drones were fired at it, killing two people in Abu Dhabi^[21]. In Saudi Arabia, a Houthi strike on Riyadh’s King Khalid International Airport on 10 October 2026 killed 13 people and injured 309^[43].

In Iran, high food inflation hits the poor hardest because food takes a larger share of their spending. Prices of meat and poultry rose by about 178% and bread and cereals by about 139% in the year to June 2026^[6]. Iranians interviewed by Euronews described sea freight rising from about $3,000 to nearly $10,000 per container, and Euronews reported that non-oil trade was down nearly 40%^[44]. Human capital, the skills and health of workers, also suffers when schools close. In Israel, weeks of missile fire closed schools in early 2026^[32].

4.8 Global inflation and the importers of Asia

The IMF projects world growth to slow from 3.5% in 2025 to 3.1% in 2026, and world inflation to rise from 4.1% to 4.7%^[8]. In April it had warned that a severe scenario could cut world growth to 2% in 2026 and 2027^[45]. The US Energy Information Administration (EIA) now expects Brent to average $96 in 2026 and $105 in the fourth quarter; US petrol averaged $4.35 a gallon in September^[46]. The IEA forecasts that world oil demand will fall by 2.6 million barrels a day in 2026, and global stocks were 509 million barrels lower than at the end of February^[2].

China was Iran’s main customer and lost most of that supply. Its imports of Iranian crude fell from 1.4 million barrels a day in 2025 to 534,000 in early August 2026^[12]. The IMF projects Chinese growth to slow from 5.0% to 4.5%^[8].

India is one of the four largest buyers of Hormuz crude^[1]. Consumer price inflation rose to 5.54% in September 2026 from 4.83% in August, with food inflation at 7.74%^[47]. On 7 October the Reserve Bank of India raised its policy rate by 0.25 percentage points to 5.50% and changed its stance to “calibrated tightening”, citing the West Asia conflict and volatile crude prices^[48].

Japan is one of the four Asian economies, with China, India and South Korea, that together took 69% of Hormuz crude flows in 2024^[1]. The IMF projects Japan’s growth to slow from 1.2% in 2025 to 0.7% in 2026^[8].

Pakistan spends $15–16 billion a year on petroleum imports, and every 10% change in oil prices adds or subtracts about $1.5–1.6 billion. On 2 March 2026 its main stock index, the KSE-100, fell 9.57%, its largest one-day fall^[49]. The IMF projects Pakistan’s inflation to rise from 4.5% in 2025 to 7.1% in 2026^[8]. Pakistan also played a diplomatic role: it hosted the April talks, and its prime minister announced that the June memorandum would take effect immediately^[22][23].

4.9 Country summary: the Gulf states

Oman is the only GCC economy the IMF expects to grow in 2026^[8]. Iraq, which is not a GCC member, is projected to shrink by 16.0%^[8].

5. What went well and what went wrong

What went well (economic policy view)

• Bypass routes and shuttles. Pipelines to Yanbu and Fujairah, convoys and ship-to-ship transfers lifted Gulf crude exports to more than 75% of pre-war levels by September 2026^[2]. Investment in spare routes before a crisis paid off.
• Regional financial support. The UAE’s currency swap gave Bahrain foreign-currency liquidity before a crisis of confidence could start^[35].
• Credible monetary policy in importers. India’s central bank acted early to stop higher energy prices from becoming higher inflation expectations^[48].
• Demand response and stocks. Lower demand and the use of stocks absorbed part of the shock: world demand is forecast to fall by 2.6 million barrels a day in 2026 and stocks fell by 509 million barrels^[2].

What went wrong

• Too little bypass capacity. Before the war only about 2.6 million barrels a day of pipeline capacity was thought available to bypass Hormuz, against 20 million barrels a day of flows^[1].
• A ceasefire without enforcement. The June memorandum promised to end the blockade and reopen the strait, but the interim peace collapsed within weeks^[23][24]. Uncertainty itself raised insurance and freight costs^[9][26].
• Loss of foreign currency in Iran. With oil exports stopped and reserves abroad frozen^[5], the rial fell and inflation approached 90%^[6], eroding real wages and savings.
• Concentrated buyers and sellers. Iran depended on one customer, China, for more than 80% of its shipped oil^[12], and almost all of Qatar’s LNG exports had to pass through the strait^[28]. Both left little room to adjust.
• Infrastructure in the line of fire. Strikes on energy facilities, such as Ras Laffan and Saudi Arabia’s East–West pipeline, created losses that last for years^[7][25].

6. The economics behind it

A supply shock to the world economy. The closure of Hormuz is a textbook adverse supply shock. Oil and gas are inputs into almost all production, so their prices raise firms’ costs. In the aggregate demand and aggregate supply (AD/AS) model, short-run aggregate supply shifts to the left. The result is higher prices and lower output at the same time, called stagflation. The IMF’s projections, slower world growth and higher world inflation in 2026, fit this pattern^[8].

Price elasticity of demand. In the short run, demand for oil is very inelastic: people still need to drive and factories still need fuel. So a small cut in supply causes a large rise in price. In August 2026 more than 10 million barrels a day of Gulf output was shut in^[38], roughly a tenth of world demand of about 102 million barrels a day^[2]. Brent’s monthly average rose by about 65% between February and April^[3]. The rise would have been bigger without the fall in stocks, which acts like extra supply.

Terms of trade and winners. The terms of trade compare export prices with import prices. An oil price rise improves the terms of trade of exporters who can still ship oil, and worsens them for importers. This is why the IMF called Russia a “winner” from higher energy prices in April 2026^[45], and why importers such as India and Pakistan face higher inflation^[47][8].

Sanctions and blockade: trade diversion and its limits. After 2018, sanctions diverted Iran’s oil trade to China, often at a discount^[12]. A naval blockade is different: it stops the physical movement of goods, so trade cannot simply be diverted. Iran’s exports fell to almost nothing^[4][5]. When a country loses most of its foreign currency, imports become scarce, the currency falls and inflation rises. Iran’s experience follows this chain^[6].

The production possibility curve (PPC). War shifts Iran’s PPC inwards. Factories, energy plants and roads are destroyed, workers are killed or lose their jobs, and investment stops. Resources are also moved from consumer goods to military goods, which is a movement along the curve. The opportunity cost of the war is the civilian output given up.

Risk premia. Insurance prices are a price of risk. When the chance of a ship being hit rises, insurers charge more, and the cost passes through to the price of delivered oil^[9]. Because risk depends on expectations, a fragile ceasefire may not bring prices down: buyers and insurers need confidence that the peace will last.

7. Outlook and the way forward

As of October 2026, there is no agreed reconstruction estimate for Iran or the Gulf. The June memorandum mentioned a $300 billion regional reconstruction fund, linked to a final nuclear agreement^[23]. Iranian and think-tank damage estimates range from about $50 billion to $300 billion^[36].

Three broad paths are possible.

• Agreement and reopening. If the strait reopens and the blockade ends, the IMF’s data imply a strong rebound in 2027: 18.8% growth for Qatar, 17.1% for Kuwait, 13.9% for Bahrain and 7.9% for Saudi Arabia^[8]. These high numbers mostly reflect output returning to normal, not new capacity. The EIA expects Brent to average $84 in 2027^[46].
• Long stand-off. If the blockade and attacks continue, exports keep leaving through costly shuttles and bypass routes. Freight and discounts already absorb a large share of Gulf crude’s value^[26]. Iran’s inflation and unemployment are likely to stay high.
• Wider escalation. Attacks are already spreading to the Red Sea and Saudi territory^[25][43]. Damage to infrastructure, such as Qatar’s LNG lines, lasts for years^[7].

Some losses will last even in the best case. Qatar’s damaged LNG trains will take three to five years to repair^[7]. World oil demand in 2027 is still forecast to be 0.6% below its 2025 level^[2], which suggests some lasting loss of demand. For Iran, recovery depends on sanctions relief and on access to frozen reserves, which the central bank governor said had not been released^[5].

8. Exam-style questions

Glossary

• Chokepoint: a narrow passage that carries a large share of world trade, such as the Strait of Hormuz.
• Force majeure: a contract clause that excuses a party from its obligations when events beyond its control, such as war, prevent delivery.
• Naval blockade: the use of warships to stop ships entering or leaving a country’s ports.
• Sanctions: restrictions placed on trade or finance with a country to put pressure on its government.
• Snapback: the mechanism in the 2015 nuclear agreement that allowed earlier UN sanctions on Iran to be restored.
• Supply shock: a sudden change in production costs or capacity that shifts aggregate supply.
• Stagflation: rising prices combined with falling or stagnant output.
• Terms of trade: the ratio of a country’s export prices to its import prices.
• War-risk premium: the extra insurance cost charged to ships entering a conflict zone, usually a percentage of the ship’s value.
• Price elasticity of demand: how much the quantity demanded responds to a change in price.
• Production possibility curve (PPC): a curve showing the maximum combinations of two goods an economy can produce with its resources.
• Currency swap: an agreement between two central banks to exchange currencies, giving one of them access to foreign-currency liquidity.

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