What are the long-term implications of the Iran war?

While a ceasefire agreement has paused fighting in the Middle East, damage to oil and gas facilities is projected to take a number of years to repair before fully resuming operations.

The conflict is likely to have several long-term implications, including a shift in capital flows to the region; an overhaul of global energy security priorities; a further weakening of European Union (EU) industrial competitiveness; and a dampening of private investment cycle.

Middle East shake-up

For Gulf countries that have invested heavily to develop their economies into regional business and tourism hubs, the conflict will likely have a significant impact on capital flows. The once-booming UAE property market has begun to cool, with deep discounts probable because of the significant supply of new units.

We expect capital flows to slow down, moving away from the Middle East toward other regions as global investors become cautious. In the short-term, we expect Gulf sovereign wealth funds to deploy capital domestically rather than invest abroad, partly in response to the Iran conflict. 

Energy security

Many Asian countries have borne the brunt of the fallout with about 80% of the oil and gas passing through the Strait of Hormuz going to Asia. We expect the Iran crisis to prompt many governments to re-assess their energy security. As a result, we believe: 

• Coal will remain a key part of the mix, as many Asian countries have large reserves. The share of gas in the energy mix has been increasing at the expense of coal. With a gas shortage expected after the conflict is over, coal will play a crucial role to plug the gap.
• The uptake of alternative energy sources — such as nuclear and renewables — is set to accelerate as governments seek to reduce exposure to hydrocarbon flows in the event of future conflicts.
• Policymakers likely will seek to create a larger buffer stock of oil and gas to mitigate against any future disruptions.

EU competitiveness strained

The EU industrial complex was already struggling from a loss of competitiveness relative to China from the fallout from the Russia-Ukraine war. With gas supplies constrained, many countries likely will scramble to secure alternative sources. The EU will compete with Asian buyers, which may result in prices remaining elevated for longer. Such a scenario likely will increase the EU’s vulnerability, squeeze growth and hinder disinflation. 

Global macroeconomic outlook

The energy shock has arrived when the global economy has been adjusting to tariff-related uncertainty. It will only serve to heighten uncertainty further, which could dampen private sector investment and squeeze tight fiscal resources as governments try to mitigate the impact of higher oil prices on households and businesses.