October 21, 2024

Escalated Middle East war could reduce global GDP by £311 billion in 2025 through higher oil prices

Roughly one year ago, tensions started to heighten in the Middle East, leading to Israel now battling both Hamas and Hezbollah in Gaza and Lebanon, respectively. There remains the risk of a further escalation in the conflict, especially after Iranian missiles attacked Israel last month.

Of course, the primary costs of war are human. However, there is a range of economic costs as well. The biggest economic impacts will be felt by the nations directly involved. The cost of war to Israel’s economy up until the end of 2025 is estimated to be around 12% of GDP, according to its central bank[1]. However, the country risks further economic damage if the war lasts longer, if resources are permanently shifted more towards defence, or if they suffer a brain drain in their globally competitive science and innovation industries.

The Lebanese economy will also face economic pain but for different reasons. The state is not officially involved in the war, so there is no need to funnel resources to the military. Instead, Lebanon will need to rebuild bombed areas and will face lower tourism during the conflict, which was estimated to contribute 9% to GDP in 2023[2].  Lebanon, too, faces the prospect of a brain drain from its historically strong banking and services sectors. Dealing with these consequences will be even more difficult given the economy’s recent poor performance, having contracted for each of the last six years as a result of a series of shocks and an ongoing liquidity crisis.

For the rest of the world, the largest impact on growth will likely come from oil markets, as was the case with the Ukraine war. Both conflicts involve members of OPEC+ in Russia and Iran.

However, the scale of potential impact is much more muted this time. Russia was the world’s second-largest oil exporter before the Ukraine war, accounting for 11% of global exports in 2021. Iran only accounted for 2% in the same year, being partially held back by the impacts of US restrictions, from which it continues to suffer. Meanwhile, Israel is also an oil producer, albeit not a major one,  only accounting for around 0.25% of global oil exports[3].

Even a scenario in which Iran’s exports of oil ground to a complete stop would not be enough to cause severe disruptions. This is because OPEC+ is currently cutting oil production voluntarily by 2.2 million barrels a day to support a higher price. In comparison, Iran was estimated to export up to 1.5 million barrels a day in 2023, according to Kpler.

Given the current overcapacity of the global oil market, we estimate that even in the scenario where there was a total loss of Iran’s production because of an all-out conflict, it would cause prices to rise by no more than 20%. OPEC+ is thought to target a price of around $90 to $100 per barrel, though it never publicly states a price target. Therefore, it is likely that the group would allow prices to rise to around this level and then start to increase production after that. We assume prices would rise no higher than $95 per barrel.

World Bank analysis suggests this would correspond to around a 0.4 percentage point decline in global growth, worth £311 billion in output in 2025. An oil price shock will manifest as an inflationary impact on importers, hitting prices at the pump, increasing energy bills, and contributing to wider price pressures throughout the supply chain.

An increase in inflation caused by oil prices would directly impact growth by exacerbating the ongoing cost-of-living crisis. As with the previous inflation wave caused by the Ukraine war, it would hurt those on lower incomes harder, given they spend a greater proportion of their incomes on necessities like fuel and utilities.

UK-specific literature estimates that the impact on growth here would be between 0.2 to 1.0 percentage points. However, the experiences of 2022 have shown that the UK is particularly exposed to global energy markets, so it would likely face a stronger-than-average impact. The same is true for much of Europe, as well as China. The US, on the other hand, is less exposed as it has been a net exporter of petrol since 2020[4].

A full-scale conflict could also have other economic impacts. While other countries in the region could benefit from some of the displacement in key sectors mentioned previously, the net impact would likely remain negative. In particular, innovation would likely suffer in areas where Israel excels, such as semiconductor design and machinery and equipment. Israel is also a major arms exporter. If it needs to hold back more of these types of goods for its defence, this may disrupt procurement for key allies. Israel is also a major exporter of citrus fruits and flowers, which could lead to some shortages.

Overall, the Middle East conflict will cause long-term damage to the involved countries but will have more muted and transitory impacts on the rest of the world. This fact should do nothing to alter the urgency of the rest of the world in trying to broker lasting peace in an all-too-often war-inflicted region.

[1] CNN Business (2024)

[2] WTTC – Travel & Tourism Economic Impact 2024

[3] Observatory of Economic Complexity – Crude Petroleum

[4] US EIA – Oil & Petroleum Exports

For more information contact:

Christopher Breen, Head of Economic Insight – cbreen@cebr.com – 020 7324 2866

Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.

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