In the period since the initial Israeli strikes on Iran on Friday 13 June the two countries continue to trade missile attacks with no clear end to the conflict in sight. In this article Sarah Hawkins explores the potential next moves on both sides, the impact on their respective economies and wider impact on stakeholders operating in the region.
Economic impact
The conflict is causing immense economic disruption in both countries. However, Iran is used to economic isolation from the West in a way that Israel is not. On the Israeli side of the conflict, Iranian missile attacks are causing a significant level of disruption to daily life and the economy, hitting targets in densely populated urban areas including Tel Aviv. Although Israel has been engaged in military operations in Gaza since 2023, Israel’s economy has not sustained significant damage during these engagements. A protracted conflict with Iran could be a different story. The question then becomes, for how long can Israel accept true economic losses in its quest for political goals?
Iran has a long history of economic isolation due to Western sanctions, but as people stream out of the capital Tehran seeking safety and key energy infrastructure is attacked, it remains to be seen how long the country can endure such an extreme level of disruption. After the assassination of Hezbollah’s leader Hassan Nasrallah and the collapse of the Syrian regime of President Bashar al-Assad, which both occurred in late 2024, Iran is also running out of political allies in the region who could come to its aid.
A critical area: The Strait of Hormuz
So what cards does Iran have left to play? A part or total blockade of the Strait of Hormuz could be one strategy, or employing the assistance of the Houthis in Yemen to create disruption in the Bab el-Mandeb region and the Red Sea
The Strait of Hormuz is only about 33 km wide at its narrowest, so the question is not necessarily can Iran effectively close the waterway, but if it makes political or economic sense to do so. Every day, about one third of the world’s seaborne crude oil, including Iranian exports, passes through this strait, with roughly 70 percent heading for Asian markets, particularly China, India, and Japan. In 2023, around 20 million barrels of crude and refined products passed through the Strait of Hormuz each day. The International Energy Agency estimates that only about 4.2 mb/d of crude could be rerouted from the Strait of Hormuz via land routes, including Saudi Arabia’s East-West pipeline to the Red Sea and the UAE’s Abu Dhabi Crude Oil Pipeline to Fujairah. Most of this oil has few transport options other than shipping via the Strait of Hormuz.
So key is this passage to regional oil shipping that Iran might find it economically unpalatable to close it for long or at all. Politically, Iran’s desire to close the Strait of Hormuz may hinge on its perception of US or wider international involvement on Israel’s side of this conflict; four vessels were attacked in the area in 2019 during heightened US-Iran tensions which Washington blamed on Tehran, although Iran denied involvement in these. If Iran believes the US is aiding Israel, the Islamic Republic may see closing the strait and inflicting pain on regional neighbours and the wider international community as a reasonable next step. Iran has already threatened to attack US, UK, and French targets if it believes these countries are assisting Israel, although there have been no reports of such attacks to date.
Thus far, shipping analytics tools and trade publications alike do not report a significant drop-off in the number of tankers passing through the Strait of Hormuz, however electronic interference seems to be on the rise. On 15 June, the international naval task force the Joint Maritime Information Center warned of extreme signal jamming along the route. On 16 June, Dubai-based United Kingdom Maritime Trade Operations (‘UKMTO’) issued a notice that it has received increasing reports of electronic interference in the area and advised vessels to proceed with caution. On 17 June, two oil tankers collided near the Strait of Hormuz.
It is possible that other potential chokepoints in the Red Sea or the Bab el-Mandeb strait, which are closer to Israel, could be alternate targets for Iranian attacks and significantly disrupt international shipping routes for months or even years to come. Starting in late 2023, Iran-backed Houthis militants caused serious disruption for almost 1.5 years at Bab el-Mandeb, located on the opposite site of the Arabian Peninsula, which drove up global shipping costs that continue to be elevated. The World Container Index’s cost per forty foot-equivalent unit (FEU) still stands significantly above its pre-December 2023 level. By using drones, missiles, and small vessels to attack shipping vessels, Houthis militants caused a large number of vessels to divert away from this path towards the Suez Canal and instead take the longer and more expensive southern route around the Cape of Good Hope.
Impact to oil and shipping
As this conflict continues, Iran and Israel’s business partners around the world will start to feel the impact too. Asian customers for oil transported via the Strait of Hormuz, particularly China, India, and Japan, could experience sharp price hikes if extensive disruption occurs. If Iranian oil in particular stopped flowing, China would feel the effects most keenly, as China is the destination of most Iranian oil exports. Meanwhile, countries with overland pipelines options, Saudi Arabia and the UAE, might put these to work like never before. The statistical unit of the US Department of Energy assesses that these two pipelines have spare capacity totalling roughly 2.6 million b/d, with Saudi Arabia capable of increasing flow on its pipeline from its current average of 5 million b/d to 7 million b/d. This would mean these countries are able to get their product to market but at a higher cost.
Disruption in the Strait of Hormuz is already occurring in the form of vessel collisions due to signal jamming and interference. The risk of oil spills, loss of cargo, danger to crews, potential damage to vessels, as well as increased congestion and associated costs must all be factored into journeys in this region. On 19 June, the head of Iranian parliament's National Security Committee, Behnam Saeedi, said Iran was considering the possibility of closing the Strait of Hormuz. Companies may decide to redirect certain vessels despite the higher costs associated with alternate routes. In the insurance sector, costs to insure cargo and vessels could increase and more claim payouts and disputes over payouts could be in order. War risk premiums for shipments to Israel have reportedly already increased as a result of the conflict.
Impact to the region and beyond
Beyond the core oil and shipping sectors, this conflict will have knock-on effects on the wider region and business community. The general inability for goods and people to circulate normally in the Gulf or wider MENA region due to airspace closures and shipping disruption will inevitably mean that business operations and decision making face delays. Some international actors might adopt a ‘wait and see’ approach to the region, putting off investment decisions. For companies already in region, the cost of doing business could rise along with the increased risk, for example in the form of higher insurance costs or unforeseen losses due to disruption.
Finally, there are reputational risks for western companies, in particular American companies, if this conflict continues. Entities perceived to be doing business with Israel could become the subject of western boycotts or protests, which has occurred during the Israel-Gaza conflict. Although western sentiment for Iran is not as high as for Palestinians, we have already seen some evidence that this conflict could negatively impact a company’s reputation. Just this week, Israeli company stands at the Paris Airshow were first covered up, then shut down by Airshow organisers, for refusing to remove attack weapons from their displays following Israel’s attacks on Iran.
In the MENA region or wider Muslim world, there is also a risk of general anti-American sentiment if the United States intervenes on the side of Israel. This could be similar to how anti-US sentiment spiked following the US invasion of Iraq in 2003, although would likely not occur to the same extent. This is due to Iran’s economic and political isolation within the region and its position as a Shia theocracy in the Sunni-majority Muslim world, meaning there would likely be less broad-base support for Iran than was felt for Iraqis in 2003 or for Palestinians today. Meanwhile inside Iran, a particularly heavy-handed international response could push Iranians toward more sympathy for their government and supportive of its policies.
