Economics and Energy

At the outset of 2026, the global natural gas market underwent a profound structural shift that eroded much of the stability built over years of rebalancing in the aftermath of the 2022 European energy crisis. Markets had been advancing towards a phase of relative supply abundance, underpinned by expanding liquefaction capacity in the United States (US) and large-scale Qatari projects. This trajectory was abruptly reversed on Feb. 28, 2026, when Operation Epic Fury triggered the most severe energy shock to confront the international system in decades. The US-Israel-Iran War and the closure of the Strait of Hormuz, removed nearly one-fifth of global liquefied natural gas supply from circulation within days.   This paper analyses the structural transformations in the global natural gas market induced by the crisis, tracing supply and demand dynamics before and after the outbreak of the conflict. It further evaluates the implications for key actors within the international energy system, including countries most exposed to global gas market volatility, such as Egypt and Jordan.

On April 7, 2026, the United States (US) and Iran announced a temporary two-week ceasefire, following intensive diplomatic mediation led by Pakistan during a critical window of escalation. The conflict had erupted on Feb. 28, 2026, when the US and Israel launched coordinated military strikes targeting Iranian infrastructure. In response, Tehran moved to close the Strait of Hormuz to international commercial shipping, precipitating the most severe energy supply shock in modern market history.   The closure effectively paralysed approximately 20 million barrels per day that would ordinarily transit the Strait of Hormuz in peacetime, accounting for nearly a quarter of global seaborne oil trade. Under the terms of the ceasefire, Iran announced a conditional reopening of the strait, while the parties agreed to commence diplomatic talks in Islamabad on April 10. This analysis examines the full scope of the crisis and evaluates the prevailing oil price scenarios, drawing on lessons from comparable historical shocks to assess the fragility of the current environment and its potential trajectories.

A defence economy comprises the fiscal, industrial, and budgetary systems through which a state finances, maintains, and adjusts its military capacity. During peacetime, these systems tend to remain stable; in wartime, they become the main mechanism through which conflict transforms a nation’s economic structure. The escalation of Israeli military operations since October 2023 and the broader confrontation with Iran and its regional proxies have caused a defence-economy shift, leading to significant realignments in how the conflicting sides allocate public resources, incur debt, and prioritise expenditure.   This analysis examines how sustained military escalation has reshaped the defence economies of its three key actors: Israel, Iran and the United States. It assesses both short-term fiscal responses and longer-term budget trajectories, arguing that the conflict has not produced a temporary spending spike but a structural transformation, one that has widened deficits, crowded out civilian services, mobilised domestic defence industries, accelerated sovereign credit deterioration, and embedded elevated military spending into national budgets in ways that will persist well beyond any ceasefire. Across the Middle East, the boundaries between battlefield expenditure and national economic health have become increasingly difficult to separate.

President Donald Trump announced that the United States will impose a naval blockade on the Strait of Hormuz after weekend talks to end the Iran war collapsed without a settlement. The Islamabad negotiations, which were intended to turn a tenuous ceasefire into a durable peace and reopen Hormuz to safe navigation, broke down over unresolved disputes on nuclear enrichment, sanctions relief, and control of maritime transit. In response, Trump issued an executive order directing the US Navy to interdict any vessel attempting to transit the strait, with particular focus on neutral and commercial ships that have paid Iranian transit tolls, which the White House now characterises as an illegal extortion regime rather than a lawful fee regime.   Trump’s declaration instantly elevates the conflict from a regional shooting war to a global maritime and energy crisis centred on the world’s most critical oil chokepoint, a waterway just twenty‑one nautical miles across at its narrowest. By pledging to enforce a blockade without United Nations Security Council authorisation, the president has pushed the United States into a legally and operationally contested grey zone, framing the move as necessary to dismantle the Islamic Revolutionary Guard Corps’ grip over the strait and sever a key stream of cryptocurrency and foreign-exchange revenue to Tehran. The administration’s strategy now hinges on whether US naval power, layered secondary sanctions, and sustained diplomatic pressure can actually sustain a prolonged blockade in the face of Iranian asymmetric deterrence. The following analysis, therefore, centers on Trump’s blockade order itself: its operational viability, Iran’s capacity to erode or break it through asymmetric tactics, and the resulting shockwaves for global energy markets, commercial shipping patterns, and regional economic stability.

The landscape of modern air warfare has undergone a profound and structural transformation over the past decade. Air superiority is no longer the exclusive domain of those possessing the most expensive and technologically advanced platforms; rather, it has become accessible to actors capable of effectively leveraging scale and repetition against sophistication and complexity. This new equation has been clearly manifested in the widespread deployment of one-way attack drones, particularly the Iranian “Shahed” series, which has significantly altered established strategic calculations. In their early iterations, these drones operated on relatively simple logic: they were pre-programmed with target coordinates and then launched to navigate their trajectories using conventional satellite navigation systems such as the American GPS and its Russian counterpart, GLONASS. However, this reliance on such systems simultaneously made them the most exploitable vulnerability, as defenders rapidly developed electronic warfare capabilities, including jamming and spoofing tools, to disrupt their guidance and neutralise their missions.   However, this reality did not endure for long. As the intensity of conflicts involving these systems escalated, Iranian drones transitioned into a fundamentally different phase with the integration of communication modules operating via the commercial satellite network Iridium. This was not merely a technical upgrade but a calculated and direct response to GPS vulnerabilities, reflecting a strategic exploitation of civilian infrastructure for military purposes. While GPS satellites struggle to withstand ground-based jamming due to the weakness of their signals transmitted from altitudes exceeding 20,000 kilometres, Iridium satellites operate in low Earth orbit at altitudes of no more than 800 kilometres, emitting signals up to a thousand times stronger. These signals are further protected by layers of encryption that make spoofing or manipulation extremely difficult.   Shahed drones have thus evolved from inert projectiles following a fixed, unalterable path into connected platforms linked to their operators in real time, capable of receiving updates, changing course, sharing data with other airborne units, and even conducting precise strikes against moving targets such as ships at sea. This report therefore offers an in-depth technical and strategic examination of this transformation and its battlefield implications, beginning with the structure and operating logic of the Iridium network, moving through an analysis of the Shahed-131 platform and the integration of these communications into it, and culminating in an assessment of the operational impact this has had on some of the world’s most complex and densely layered air defence systems, namely Israel’s multi-layered architecture, which faced its most severe tests between 2024 and 2026.

The economic architecture of the Islamic Republic of Iran is defined by a persistent paradox. While decades of international sanctions have systematically reduced its formal integration into global energy markets, the state remains structurally tethered to a remarkably narrow set of export channels. At the absolute centre of this system lies Kharg Island, a strategic node that handles the overwhelming majority of the nation’s crude oil exports. To date, Western policy has focused on regulatory friction, using sanctions to increase transaction costs and discount prices. However, a transition from regulatory friction to kinetic disruption, specifically a scenario where the U.S. or allied strikes disable Kharg Island, would represent a fundamental phase shift.   Such an event would not merely be a temporary supply disruption; it would constitute a systemic rupture in Iran’s primary revenue-generation mechanism. It necessitates the consideration of a critical counterfactual: what occurs when oil ceases to function as the core economic pillar of the state, not through gradual policy shifts, but through an abrupt, physical termination of export capacity? The resulting post-oil environment would trigger a reconfiguration of the Iranian state, moving it from a centralized rentier model to a decentralized, network-based economy of scarcity.

Economic and geopolitical relations between China and Israel have undergone significant changes following the War on Gaza. Chinese regulatory authorities moved to classify certain areas within Israel under what is known as the Red Category, an official administrative designation that identifies these locations as high-risk investment zones. This classification imposes legal restrictions that prevent the injection of new financial investments into these areas.   As a result, a legal environment has emerged in which Chinese companies rely on security warning protocols and personnel safety considerations as a formal justification for controlling capital flows and suspending the implementation of certain financial obligations under previously signed contracts. This development necessitates a careful examination to understand how these risk assessment mechanisms operate and their tangible impact on the economic relationship between the two countries.

One of the most structurally fragile economies in the Middle East serves as the backdrop to Iran’s current military confrontation. Extensive international sanctions have, for more than a decade, restricted Iran’s access to global financial markets, constrained its energy exports, and limited foreign investment. Gradually, the Iranian economy came to evolve as a sanctions-adaptation economy, surviving persistent external pressure through informal trade networks, shadow energy exports, and alternative financial channels instead of collapsing outright.   Yet unlike sanctions, which create gradual economic constraints, war introduces a fundamentally different kind of shock by disrupting logistics networks, causing unprecedented damage to national infrastructure and compelling the state to reallocate its resources toward defense spending amid military escalation. Such shocks, for an already fragile economy operating at the limits of macroeconomic stability, can generate disproportionate consequences. The current conflict therefore brings into focus a central economic question: can Iran’s sanctions-adapted economy withstand the pressures of war, or will military escalation reveal structural weaknesses previously concealed by the sanction’s system?

Iran has blocked maritime navigation through the Strait of Hormuz since the first week of March, following the attacks it sustained during Operation Epic Fury. This disruption has hindered the movement of nearly 20 million barrels of crude oil per day. It has trapped shipments of liquefied natural gas, accounting for around 20% of global consumption, within the waters of the Arabian Gulf. As a result, international energy markets are experiencing sharp price volatility affecting Brent crude futures and European gas contracts.   At the same time, maritime shipping lines have been compelled to reroute their commercial fleets, forcing them to navigate around the historic Cape of Good Hope route at the southern tip of Africa. This enforced geographic diversion adds approximately 19 days to maritime transit times to and from Asia, generating weekly losses for global supply chains estimated at between $2 billion and $3 billion in additional operating and fuel costs.   This operational disruption directly affects the technological infrastructure of East Asia, where advanced semiconductor fabrication facilities in Taiwan and South Korea require vast, continuous electricity supplies to operate lithography systems around the clock. These critical facilities, which account for approximately 68% of global semiconductor production, rely on imported liquefied natural gas to ensure the stability of their power networks and prevent disruptions.   In parallel, the precision manufacturing processes involved depend on highly specialised raw materials whose primary sources are concentrated in regions currently affected by the crisis. In particular, production lines require ultra-high-purity helium gas, extracted as a by-product from Gulf LNG liquefaction facilities, which represent roughly 35% of global supply, as well as bromine, which Korean factories import at a rate of 97.5% from the Dead Sea coast for chemical etching processes. Accordingly, technology firms are accelerating efforts to assess their exposure to the dual energy and critical chemical input shortages. At the same time, economic stakeholders monitor the crisis's trajectory with heightened caution to safeguard supply chain continuity.   Accordingly, this analysis examines the strategic and operational implications arising from the closure, focusing on three principal dimensions. First, it addresses the disruption of liquefied natural gas supplies and their direct impact on the security of power grids that sustain major Asian semiconductor manufacturing hubs. Second, it examines the sharp interruption in the supply of critical raw materials, particularly specialised gases and petrochemical inputs required for precision manufacturing processes. Finally, it explores the logistical repercussions of the forced rerouting of maritime shipping routes, as well as the strategic measures states are considering to mitigate future geopolitical risks.

The United States and Israel launched Operation Epic Fury in late February 2026, targeting Iran’s nuclear and missile infrastructure and seeking to remove its political leadership. Although the operation achieved its initial tactical objectives with high precision, it provoked an asymmetric retaliatory response from the remaining Iranian forces. This response took the form of a comprehensive blockade of the Strait of Hormuz, the world’s most critical maritime artery for energy transport, triggering a severe global economic shock. Such disruption could propel the international system towards reducing its reliance on fossil fuels and accelerating the adoption of alternative domestic energy solutions, most notably nuclear power.   At the same time, global electricity demand is rising sharply, driven by the rapid expansion of advanced artificial intelligence infrastructure and high-performance computing facilities. This sudden disruption of fuel supplies places policymakers in major industrial economies under immediate economic and security pressures, while simultaneously exposing the profound consequences of closing the Strait. In this context, the present analysis examines the repercussions of the Strait of Hormuz's closure on global supply chains. It then develops a historical comparison with the oil price shocks of the 1970s, illustrating how those crises redirected states towards nuclear technology. The study concludes by analysing emerging regulatory and financial measures, as well as new geopolitical alignments, that are accelerating the global drive to construct nuclear reactors in 2026.

While global attention remains focused on the situation in the Strait of Hormuz, through which nearly twenty million barrels of crude oil pass each day, less attention is given to the potentially more significant developments occurring within Iran’s borders. As of March 2026, the military strikes carried out by the United States and Israel generated what can be described as a caloric chokepoint effect, which cannot be offset by any level of kinetic military capabilities. According to the Islamic Republic of Iran, the country’s principal vulnerability in the 21st century lies in its deep-water grain elevators, rather that its military power.   While Iran’s food supply system is logistically fragile and assumes that the country’s southern ports will always remain accessible and fully operational, however, the withdrawal of war-risk insurance and the stalling of shipping through Bandar Abbas have invalidated this assumption. Therefore, describing the current situation merely as a trade disruption is inaccurate, as it effectively represents a biological countdown. As operational feed stocks decline to a fourteen-day supply, the resulting protein shortage poses a significant risk of domestic instability—an effect that conventional military strikes are unlikely to match.

The Feb. 28, 2026 United States–Israeli offensive against Iran represents the most consequential escalation in Gulf security dynamics in over a decade and introduces immediate, medium-term, and long-term risks to global energy stability. The strikes targeting senior leadership and strategic military infrastructure triggered Iranian retaliation across the Gulf region and sharply increased the probability of disruption to maritime energy flows, particularly through the Strait of Hormuz.   While physical supply outages remain limited at the time of writing, markets have responded by repricing geopolitical risk. Crude benchmarks surged on reopening, freight and insurance costs rose materially, and volatility spiked across commodities and currency markets. The core economic question is not whether prices react, they already have, but whether the conflict transitions from a risk-premium shock to a sustained supply disruption.   The Strait of Hormuz remains the central transmission channel. Roughly one-fifth of globally traded oil and more than one-third of seaborne liquefied natural gas pass through this chokepoint. Even temporary interference has outsized macroeconomic implications. Assessing the implications of the crisis requires examining immediate market reactions, potential disruption scenarios, medium-term supply responses, and the longer-term structural consequences for global energy security and macroeconomic stability.