​I. Geopolitical Overview & Market Context

Pre-conflict regional balance 
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In 2025, the Middle East was the undisputed backbone of global energy supply. OPEC+ accounted for nearly half of the world’s oil supply of approximately 106 million barrels per day (mb/d). Since 2022, the oil producers’ alliance has held collective production cuts of 6 mb/d, with Saudi Arabia representing 1 mb/d of voluntary reductions alone. Separately, the IEA estimated OPEC to have a spare capacity of 5.3 mb/d, of which 3.1 mb/d can be attributed to Saudi Arabia, 1.1 mb/d to the UAE, with the remainder held by other smaller producers, effectively making it the world’s emergency supply buffer. On the gas side, after the outbreak of the Russia-Ukraine war in 2022, the EU heavily reduced commercial relations with Russia, which forced the EU to offset this supply shortage by relying on Middle Eastern countries. More specifically, 10% of LNG transiting through the Strait of Hormuz from Qatar and the United Arab Emirates was being exported to the EU. Iran’s oil exports were heavily concentrated due to US sanctions, creating a quasi-monopsony. In fact, over 90% of its 1.5 mb/d in crude oil exports were destined to China. It was a system that depended entirely on the free flow of traffic in a 33-34km pocket of contested water.

The military operation 

​The war that is now reshaping global energy markets began at 9:45 a.m. Tehran time on February 28, 2026. At the order of President Donald Trump, the United States and Israel launched Operation Epic Fury, a coordinated surprise assault that struck hundreds of military targets across Iran within the first hours, assassinating Supreme Leader Ali Khamenei at his Tehran residence. The first few days were the most expensive in the history of the modern American military. The Center for Strategic and International Studies (CSIS) stated that the operational cost was $11.3 billion in its first six days alone. On Day 12, the total costs reached $16.5 billion. Iran responded immediately by closing the Strait of Hormuz, which caused the worst energy supply shock in decades.

Immediate Impact on Oil Prices

On the morning of March 2, Brent crude spiked approximately 8%  and European natural gas prices surged 20% to 38€ per megawatt-hour, as traders scrambled to price in worst-case scenarios before physical disruption had even materialized. By the following week, Brent had crossed $90 per barrel, a 24% surge in a single week, the largest since the COVID pandemic. The closure of the Strait of Hormuz effectively removed approximately 11 million barrels per day from global supply, representing a net shortfall of roughly 10% of global petroleum consumption, after accounting for partial bypass capacity through Gulf pipelines.
Goldman Sachs estimated a risk premium of $14 per barrel embedded in prices as of March 3, equivalent to the impact of a full four-week Hormuz closure, even though actual barrel losses remained partial at that point. This risk premium triggered an immediate and violent repricing across energy derivatives markets. Brent prices for immediate delivery rose far above those for later months, with the gap between the front-month and six-month contracts widening to $10 per barrel as traders reacted to fears of a severe short-term supply shortage. 
In the options market, the Cboe Crude Oil Volatility Index (OVX) surged from 65 (February 27) to 121 (March 11), showing that traders were moving to protect themselves against the risk of an extreme further jump in oil prices. Implied volatility for short-term contracts skyrocketed, pushing the market to its most bullish level since 2015 as speculative traders aggressively accumulated out-of-the-money call spreads targeting $120 to $150 strikes. The panic for secure supply even caused WTI crude to temporarily invert its usual discount, trading at a premium over Brent as buyers rushed to secure accessible barrels completely isolated from the Strait of Hormuz disruption.

The Strait of Hormuz and Critical Chokepoints

The Strait of Hormuz was and remains  the most critical energy chokepoint in the world. In 2025, it carried approximately 20 mb/d (crude oil and refined products), representing about 20% of global petroleum consumption. The same corridor also serves Qatar's entire LNG export complex at Ras Laffan. This means that any effective closure will cause an oil and gas shock to both European and Asian markets at the same time. This stopped tanker traffic and raised war-risk insurance premiums to levels not seen since the tanker wars of the 1980s. The actual supply shortfall was 11.1 mb/d, compared to a global baseline of 106.9 mb/d. There are other ways to get around, but they are not as efficient. Saudi Arabia's East-West Petroline and the Abu Dhabi Crude Oil Pipeline, which can cover less than half of Hormuz's normal daily flow combined. The Red Sea, which has been disrupted by Houthi attacks since late 2023, is a second chokepoint that makes the crisis worse. Any serious disruption to the Strait of Hormuz would expose how little fallback exists in the global energy system and how quickly a regional conflict can become a worldwide economic shock.

​II. Exporting Countries Analysis (Supply Side)

​Key Producers

The scale of the shock can only be comprehended by examining the producers themselves: how much was pumping, what routes were available, and how exposed were the exports when the Strait was sealed.

​The Persian Gulf is home to the most concentrated pool of exportable oil on the planet. Before the conflict, Saudi Arabia was producing around 10 mb/d against a capacity of 12 mb/d, the UAE held a capacity of 4.5 mb/d, Kuwait was pumping 2.6 mb/d, and Iraq was approaching 4.5 mb/d, with ambitions to reach 5 mb/d. Together, these four countries sit atop an estimated 626 billion barrels of proven crude oil reserves, nearly a third of the world's proven total. Qatar, while a relatively minor oil producer, occupies a unique position in global gas markets: as the world's second-largest LNG exporter, it accounts for roughly 20% of global LNG supply, making it the single most important swing supplier for both European and Asian buyers.

Beyond the Gulf, the other producers that matter to this story are those entirely outside the war zone. Among the largest net exporters, we find Russia, Norway, and Canada, all of which benefit from the increased prices due to their independence from the Strait.

​Production & Capacity

A fundamental aspect of the mechanism behind the supply shock is that Gulf producers were primarily shut down by a lack of oil storage capacity, rather than other forms of disruptions. Once tanker traffic through the Strait ground to a halt, crude began filling onshore storage across the region, thus filling tanks and interrupting operations. By mid-March, the combined output of Saudi Arabia, Iraq, the UAE, and Kuwait had been cut by over 10 mb/d, representing around 10% of global supply. Iraq was the most exposed, with no meaningful alternative export route from its southern fields, and output collapsed by around 80%. Kuwait and Qatar followed, declaring force majeure within days of each other. Even Saudi Arabia, which at least has pipeline access to the Red Sea, was eventually forced to cut production.

Additionally, while in normal times the Gulf's spare capacity is the oil market's main safety net, it too was immobilized due to its mandatory passage through the Strait of Hormuz. In fact, heading into the conflict, the four major Arab producers combined for around 4 mb/d of spare capacity, the vast majority of the world's total. When the Strait eventually reopens, the OPEC+ alliance will face the challenge of managing the re-entry of Gulf barrels without crashing the price, further complicating coordination.

Infrastructure & Trade Routes

The obvious question once the Strait closed was whether Gulf producers could reroute their exports. This can primarily be achieved through two pipelines: Saudi Arabia's East-West Pipeline and the UAE’s Abu Dhabi Crude Oil Pipeline (ADCOP). Even combining both pipelines at full stretch, the region can bypass between 3.5-5.5 mb/d, against the roughly 20 mb/d that normally transits Hormuz.

Iraq best illustrates the problem. Its southern fields, which produce the overwhelming majority of its exportable crude, have no meaningful connection to the northern Kirkuk-Ceyhan pipeline to Turkey. At best, road transport can move only marginal volumes relative to Iraq’s multi-million barrel per day production base.

Additionally, the bypass pipelines that do exist carry their own risks, as pipelines and pumping stations are static, high-value targets. This risk is not theoretical, as drones struck pumping stations on Saudi Arabia's East-West Pipeline in 2019, forcing a temporary shutdown of a line built specifically to circumvent the Strait. During the current conflict, drone attacks have disrupted loadings on the ADCOP, and Saudi Arabia also intercepted drones aimed at their oil infrastructure. Therefore, the existing bypass routes offer partial relief, not security.

For LNG, the bypass problem is even more acute, as it is inherently a maritime product. There are no pipelines that can replicate Qatari gas flows to Asia and Europe, and the only alternative suppliers capable of filling even part of the gap are US exporters. However, with them mostly being at peak capacity and the long freight times, there is no quick fix to the problem.

Strategic Implications

The Strait of Hormuz closure and the related disruption of the oil markets have highlighted the flaws in the previous system of Gulf energy geopolitics. In fact, since 1945, the US-Saudi relationship has been based on an implicit deal in which the Gulf supplies steady flows of oil to global markets, and the US enables such flows by granting the necessary security. However, the fragility of such an arrangement has been exposed, with the importance of the Strait being increasingly evident. For Gulf exporters, vast reserves and low production costs count for very little if you cannot get your oil to market.

Producers outside the war zone show an entirely different picture. Norway and Canada are facing higher revenues without any operational risk, but Russia is the standout case. Before the conflict, Moscow's energy revenues were falling, and the Kremlin was reportedly preparing spending cuts. The Iran war effectively bailed it out: the KSE Institute estimates between $45 and $151 billion in additional budget revenues for Russia in 2026 alone, depending on the duration of the conflict. The boost extends beyond crude oil, with Qatari LNG supplies being disrupted and Russian pipeline gas to Europe seeing prices it had not seen since 2022. Additionally, despite Russia reportedly supplying Iran with satellite intelligence on US and allied assets, the Trump administration issued a temporary waiver for Russian oil already at sea to alleviate pressure on prices. 

​The key lesson for producing countries is that location matters as much as the size of reserves. The crisis has made clear that, while twenty percent of global oil flowing through a 33-34-kilometer chokepoint was always a vulnerability, it simply was not treated as one while US security guarantees held. Such an assumption is now gone. For Gulf producers, the shock will accelerate investment in bypass infrastructure and storage capacity. For outside producers, it is clear that distance from the Strait has become a competitive edge that will shape pricing and investment beyond the crisis itself.

​III. Importing Countries Analysis (Demand Side)

The economic fallout from the conflict is impacting the whole world, but the net effect varies significantly among regions. To better understand its consequences, this section of the analysis provides insights into the most exposed regions with a specific focus on Europe. It also offers an overview of the main transmission channels and the window of opportunity for this region.

I. Exposed Demand-Side Regions 

​Asia

Around 80% of Asia’s oil imports pass through the Strait of Hormuz, which has been closed since the start of the conflict, putting pressure on Asian nations’ energy buffers and causing expected sustained inflation. As surging oil prices are anticipated to shoot up prices in nearly any sector, from food to transportation, Asian countries are trying to adopt fuel-saving measures. 
India has been prioritizing households by redirecting supplies of LPG away from industrial users, Bangladesh and South Korea imposed fuel caps, and Japan started releasing oil from national reserves. Smaller energy-importing economies, including the Philippines, Pakistan, and Sri Lanka, are likely to experience comparatively stronger macroeconomic effects, as in these regions, higher oil prices rapidly translate into inflation, current account deficit, and exchange rate pressures.

Nevertheless, one country in this region might be able to cope with the consequences of the conflict while being less impacted compared to its neighbours. China, which imports around 40% of its oil from the Middle East, has strategically increased its oil imports against supply disruption and can now rely on its 1.4 billion barrels of crude, the largest energy buffer in Asia. Moreover, due to its partnerships with Russia and Iran, China finds shelter through overland pipelines of natural gas from Russia and the allowance for its vessels to pass through the strait.

Europe

Europe's most vulnerable spot is LNG imports: tightened global availability increases the competition with Asian buyers and pushes up European gas prices. The scenario is worsened by lower gas storage levels compared to recent years: 46 billion cubic metres (bcm) at the end of February 2026, against the 60 bcm in 2025 and 77 bcm in 2024.

EU dependence on Middle East energy supply

Europe is a net energy importer and relies heavily on fossil fuels, which make up more than half of its energy consumption. After the ban on Russian natural gas imports, Europe became more dependent on global LNG supplies, now mainly imported from the US (45-50%) and Qatar (15%), Europe’s largest Middle Eastern LNG supplier. Even though European dependence on imports from the Middle East is only moderate, the conflict is creating indirect threats due to global price spikes and supply chain disturbances.

EU difference with Russian energy crisis

Comparing the 2022 Russian gas crisis with the current Iran conflict can provide insights into energy shocks response, and solutions implemented by the EU. However, it is important to note that the two scenarios differ significantly in their mechanism and fiscal contexts. On one hand, the crisis following the war in Ukraine resulted from a sudden and permanent fall in the supply of gas and oil from Russia. On the other hand, the current crisis reflects uncertainty over how long the Strait of Hormuz blockage will extend and how permanent the physical damage to energy infrastructure will be. In both cases, a geopolitical shock removed a major supply source, causing spot prices to surge globally and hit Europe through market transmission rather than direct supply cuts. 

​Moreover, in both episodes, energy-driven inflation forced the ECB to abandon planned monetary easing. However, compared to the sanction-driven political conflict with Russia, the current closure of the Strait of Hormuz represents a physical blockage that the previous rerouting strategy cannot overcome. 

​Furthermore, the partial replacement of Russian pipeline gas with LNG imports has created a new vulnerability, as around 15% of EU LNG now transits through Hormuz. The eurozone fiscal room is tighter: the budget deficit increased compared to pre-covid 2019 levels, and borrowing costs are elevated rather than near-zero. Compared to the EU provisions during the global energy crisis of 2022, which shed light on EU overdependence on Russian natural gas, the EU is now more debt-burdened, making it unlikely that EU countries will receive support similar to the one provided by the RePowerEU plan.

Americas

The impact of the conflict on the Americas is dual. The United States, being the world's largest oil producer, sees its energy companies benefit directly from surging global prices, with firms receiving requests from Europe and Asia seeking alternative supplies. However, insulation is not complete, and the US remains subject to global price transmission. US LNG exports are already running at near-full capacity, and their additional supply can only partly cover the gap left by Qatar's shutdown. On the contrary, Latin America is a net beneficiary of the conflict: global importers that are trying to diversify away from the Gulf suppliers are increasingly sealing deals to ensure oil supplies from this region, a phenomenon that might reshape the trading framework well beyond the conflict.

II. Transmission Channels 

For the European economies, the Iran conflict is transmitting the current oil and gas shock through distinct but interlocking channels, namely inflation, currency and trade balance deterioration, and monetary policy tightening. Moreover, the combined result of inflation and GDP growth moving in opposite directions is creating stagflation concerns.

Inflation

For energy-importing economies, the primary transmission mechanism is via inflation: higher oil and gas prices raise the import bill, with negative effects on households' purchasing power and firm costs. Eurozone consumer price inflation accelerated to 2.5% in March 2026, up from 1.9% in February. In its revised March 19 projections, the ECB raised its headline inflation forecast to 2.6% for 2026 (from 1.9% in the pre-conflict baseline), before declining to 2.0% in 2027 (from 1.8%) and 2.1% in 2028 (from 2.0%). In particular, the ECB’s scenario analysis for 2026 includes three possible trajectories: in the baseline, inflation is projected to increase sharply to 3.1% in Q2 2026, due to a surge in energy costs, before declining to 2.8% in Q3. Meanwhile, the adverse and severe scenarios project inflation being 0.9 percentage points and 1.8 percentage points above baseline, respectively. Moreover, GDP growth was revised down to just 0.9% in 2026. The UK faces an even sharper path, with the Bank of England projecting CPI between 3% and 3.5% in Q2 and Q3 2026, the highest forecasts of any major European economy.

Currency and Trade Balances

The second channel is currency and terms-of-trade deterioration: as energy imports become more expensive, a larger amount of euros and pounds may be expected to be exchanged into dollars to settle oil contracts, thus placing depreciation pressure on European currencies. In particular, as the Euro weakens, all imports become more expensive, potentially worsening the inflation prospects. The eurozone has historically run a current account surplus, which has been a structural source of the euro's strength and a buffer against external shocks. Nevertheless, the Iran conflict might shrink that surplus directly, as shown by the €6 billion extra fossil fuel import bill in just the first 17 days. If the surplus narrows significantly, the euro loses one of its fundamental strengths, which could trigger a depreciation-inflation spiral.

Interest Rate and Stagflation
Prior to the outbreak of the Iran conflict in late February 2026, the ECB's monetary policy trajectory appeared oriented toward further easing. In its December 2025 projections, the ECB estimated inflation at 1.9% in 2026, 1.8% in 2027, and 2.0% in 2028, a path that could have allowed the institution to complete a rate-cutting cycle. 

​However, with oil and gas price assumptions revised upward and the material risks of inflation mentioned above, the ECB decided to keep the deposit facility rate unchanged at 2.00%, making further easing less likely. This shift in the expected path of rates has profound implications for investment. Higher capital costs increased the hurdle rate, creating partial uncertainty around investments and increasing the debt costs for leveraged firms. Simultaneous European sovereign bond markets experienced yield surges: Germany's 10-year Bund yield rose from 2.65% to around 3%, France's 10-year OAT yield increased from 3.2% to above 3.7%, and Italy's 10-year BTP yield surpassed 3.9%.

Finally, inflation expectations were revised upwards, and investments and GDP growth downwards might be a signal of stagflation, as declared by the European Economic ​Commissioner Valdis Dombrovskis. The Commissioner also stated that this risk materialises even if energy disruptions are brief, with EU growth potentially 0.4 percentage points below pre-conflict forecasts. Whereas, if disruptions prove more persistent, growth could be 0.6 percentage points lower in both 2026 and 2027.

​III. Tools and Opportunities

EU Countries Responses

Absent a unified EU response from Brussels, European countries are opting for different responses to the energy supply shocks. Spain approved the most comprehensive package of any EU country with a €5 billion plan to cushion price rises. The centrepiece of the proposal is a VAT reduction on any form of energy from 21% to 10% and a direct subsidy on fuel prices for transport firms, farmers, and fisheries. Germany has faced a significant increase in petrol prices and opted to regulate behaviour at petrol stations rather than grant direct subsidies. A €0.25 per litre tax reduction on fuel has been introduced in Italy, and plans to use VAT revenues from higher fuel prices as a cushion have been announced. France, by contrast, has focused its efforts on diplomacy rather than tax cuts, with President Macron pushing in the European Council for a proposal to halt attacks on energy and water infrastructure, while no tax-reduction measures equivalent to those in Spain have been announced. Austria has gone further than Germany on price regulation, allowing operators to increase fuel prices only three times per week, while cuts can be applied at any time.

EU Window of Opportunity

Similar to what happened with the Ukraine invasion and the following sanctions on Russian natural gas, the Iranian conflict sheds further light on the European over-reliance on energy imports. Along with stemming its impact on economic outcomes and growth, European countries could leverage the crisis to implement structural transformation in domestic energy production, namely through further investments in renewables and openness to nuclear solutions. 

The most immediate lesson is delivered by Spain's own experience: countries that have replaced gas generation with renewable energy are less exposed to fossil-fuel price shock, showing the benefits of accelerating renewables deployment. 

Nuclear power investments are another possible solution, especially considering the technological advancement in the sector. Where national fleets remain operational, this source of energy offers an additional and immediate buffer. For instance, generating over 70% of its electricity from nuclear, France has shown more resilience to the gas and oil price surges.

However, translating nuclear energy proposals into concrete solutions requires addressing two structural obstacles. The first is time: new nuclear plants are a multi-year or multi-decade undertaking and offer no relief for the current crisis. The second is supply chain dependency. The EU needs to sort out the gaps in the nuclear supply chain, and private players require long-term stability before committing to large capital investments, something that seems rather unlikely to occur.

Taken together, only by reducing structural dependence on oil and LNG imports can Europe shield its economy from external shocks and ensure more stability in economic outcomes for households and firms.

​IV. Conclusion

The most important part of the Hormuz crisis is not the extent of the disruption, but how predictable the vulnerability was. 20% of the world's oil flows through a 33-34-kilometer chokepoint, which is a known risk. This risk was accepted because US security guarantees made it seem theoretical. Operation Epic Fury made it very real. 

The market response revealed three basic truths: spare capacity is only helpful if there is infrastructure to use it; bypass pipelines are smaller and turned out to be easy targets; and the crisis created clear winners and losers. Russia received an effective budget bailout worth up to $151 billion, while smaller Asian importers faced inflation and currency issues. 

For Europe, this is the second major energy shock in four years. The lesson is the same both times: relying on one supplier brings geopolitical risk directly into household bills and government bond yields. The options for fiscal and monetary actions are fewer now than they were in 2022. While there is still a chance to diversify, that chance is shrinking with each crisis that arises instead of being resolved.

​By: Tommaso Delfino, Giacomo Ferrante, Leonardo Rossini

Sources: 

• Al Jazeera
  
• Bloomberg
  
• Bruegel
  
• Center for Strategic and International Studies (CSIS)
  
• CNBC
  
• Columbia University – Center on Global Energy Policy
  
• Congressional Research Service
  
• Council of the European Union (Eurogroup / Consilium)
  
• Deloitte
  
• Energy Institute
  
• Euronews
  
• European Central Bank (ECB)
  
• Financial Times
  
• Goldman Sachs
  
• International Energy Agency (IEA)
  
• Investing.com
  
• Kyiv School of Economics Institute
  
• NBC News
  
• Organization of the Petroleum Exporting Countries (OPEC)
  
• Reuters
  
• TIME Magazine
  
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• UK Parliament – House of Commons Library
  
• Yahoo Finance​