At 2:00 a.m. on June 13, Israeli fighter jets lit up the skies over Isfahan, striking Iranian weapons facilities in a precision raid. By dawn, Tehran had launched its own salvo missiles, which rained down on air bases in southern Israel. Within hours, global markets convulsed. Brent crude soared past $74.23 a barrel, and the S&P 500 slid more than 1%. Gold spiked to a record past $3,400 an ounce.
This was a flashing red signal to the global economy, that if Israel and Iran collide head-on, the fallout won’t stay in the region. It will be planetary and immediate.
In a world this wired and interconnected, physical geographies both shape and transcend economic relations and trading patterns. The Strait of Hormuz isn’t just a Persian Gulf chokepoint; it’s a pressure valve for global inflation. The Red Sea serves as a lifeline for supplying grain to Africa, electronics to Europe, and energy to Asia. Today’s economy is optimised for speed, not shock. So, when any regional conflict breaks the circuit, the system doesn’t bend; rather, it snaps.
It’s Already Started
What’s unfolding is not a proxy clash by any remote control. These are two regional heavyweights with real military capabilities and no off-ramp in sight. If the situation escalates, there will be knock-on effects. Oil could easily rocket past $120 per barrel. Shipping lanes may need to be rerouted thousands of miles around the Cape of Good Hope.
Investors aren’t waiting to see how bad it gets. Airline stocks have already plunged, bracing for a fuel cost spike. Egypt’s Suez Canal revenue had already plummeted to nearly two-thirds in 2024, and now, it’s again staring down the barrel of lost revenues. In India, where 90% of oil is imported, every $10 increase in the price of a crude barrel can widen the current account deficit by up to 0.4% of GDP, as economists estimate, and add up to 35 basis points to headline consumer inflation.
Then there’s the financial contagion. War breeds volatility. Volatility scares capital. Emerging markets become risk zones overnight. Currencies tumble, sovereign bonds lose shine and interest rates climb, just as they did after Russia’s invasion of Ukraine. But this time, the pace could be swifter, and the ripple wider.
How War Travels
Wars today aren’t just fought in airspace and deserts; they’re fought across straits, shipping lanes, and spreadsheets. And if Israel and Iran go head-to-head in a full-scale conflict, it’s not just missiles that will fly, but also premiums, prices, and panic across the global economy.
At the centre of this storm lies the Strait of Hormuz, just 33 kilometres wide at its narrowest but responsible for moving over 20 million barrels of oil per day – a fifth of that global consumption. Iran has long threatened to blockade this chokepoint in the event of war. Should it make good on that threat, the consequences would be the equivalent of cutting a major vein in the global energy system, and no alternative pipelines through Saudi Arabia or the UAE would be enough.
Meanwhile, Red Sea shipping lanes are already under siege. Houthi attacks since 2023 have sent freight insurance premiums soaring and diverted hundreds of ships away from the Suez Canal. A wider conflict, especially if Hezbollah enters from Lebanon and drags in Syria or even US naval forces, could turn this disruption into paralysis. And that matters because the Suez doesn’t just carry oil, it carries grains, chemicals, electronics and the very materials that underpin global supply chains.
The consequence is rising inflation without borders. This will be a cost embedded in food, transport, and manufacturing. Grain prices, while not directly tied to Iran or Israel, spike when shipping gets delayed. In early 2024, Suez-related detours added weeks to bulk cargo routes, forcing importers in Africa and Asia to pay more for staples. A similar scenario now would hit nations like India, Pakistan, Egypt and Turkey, which rely heavily on both energy and food imports to keep domestic prices and political tempers under control.
A Risk For Fragile Economies
But what makes this moment especially dangerous is that many of these countries are already economically fragile. India, importing 90% of its oil, spent $137 billion on crude between April 2024 and February 2025. Every $10 spike in prices now could deepen its trade deficit and derail fiscal targets. Pakistan, reeling from its own debt crisis, imports 85% of its oil and has only recently tamed inflation, from 29% in December 2023 to 3.5% in May 2025. A new price shock could undo that in weeks. Egypt, which is a net importer of both oil and food, also relies on Suez Canal fees, which may drop sharply if trade bypasses it.
Even relatively more resilient players such as the European Union (EU) or Turkey aren’t immune. The EU’s diversified energy mix doesn’t make it inflation-proof, and Turkey’s dependence on Russian crude, combined with rising freight rates, could worsen its ongoing currency instability.
The trouble doesn’t stop with import bills. Central banks are boxed in. Should they raise interest rates to fight inflation and risk recession? Or should they lower them to spur growth and fuel currency depreciation? In short, monetary policy becomes a game of picking the lesser crisis.
Amid this volatility, countries are beginning to retreat, not from conflict but from integration. The threat of war accelerates de-globalisation: pushing nations toward “friend-shoring”, seeking trade only with allies, building self-reliant energy systems and doubling down on trade nationalism. It’s the logical response to global instability, but also one that could make the world poorer, less efficient, and more fragmented.
As oil tankers reroute and central banks brace for turbulence, the economic logic of war is clear: it creates shocks, feeds inflation and punishes the vulnerable. The only real hedge left is peace.
And that brings us to the uncomfortable but necessary question: what would it take to invest in peace, not as a moral aspiration but as hard-nosed economic policy?
Peace As Prevention
In hindsight, war is always more expensive than peace, yet time and again, the world pays the higher price. Ukraine’s reconstruction costs today already exceed $480 billion, while the cost of Gaza’s 2023 destruction has crossed $50 billion. These numbers should serve as a reminder that usually, by the time ceasefires arrive, economies have cratered, institutions weakened, and futures lost. Now, with Israel and Iran standing on the brink of open war, the question is not whether the world can afford another conflict, but whether it can afford another failure of imagination.
Global diplomacy, however, is stuck in post-mortem mode. The UN, restrained by power politics, too often arrives after the damage is done. Great powers, conflicted between arms sales and restraint, signal confusion more than clarity. Regional actors gamble on deterrence, ignoring the longer arc of decline that war accelerates.
This doesn’t have to be inevitable. Iran and Israel, two nations with educated populations, technological capability and deep civilizational memory, have more to gain from strategic restraint than spectacle. War may signal resolve, but peace signals control. And in a volatile global order, control is the ultimate strength.
A ‘Stability Index’
Instead of waiting for bombs to fall, what if we built a Peace Stability Index that treated diplomacy like a sovereign asset? Or a G20 protocol that activated economic buffers in response to rising conflict risk? These are not utopian ideas. They are overdue tools in a century where war moves faster than any negotiations.
For Israel and Iran, the real show of strength won’t be in escalation but in choosing not to let history repeat itself.
(Deepanshu Mohan is Professor and Dean, O.P. Jindal Global University, and currently a Visiting Professor at the London School of Economics and Visiting Research Fellow, University of Oxford. Ankur Singh is a Research Analyst with CNES, O.P. Jindal Global University.)
Disclaimer: These are the personal opinions of the author
