Straitened Times: War, Oil and the Unravelling of Globalisation

The ongoing Iran conflict is a systemic shock that exposes how fragile the world economy becomes when chokepoints close and diplomacy fails.

“Arthasya mūlam karma,” wrote Kautilya, wealth is the root of all human endeavour. It is a maxim that has outlived empires, surviving the churn of kingdoms, colonies and modern nation-states. But the present moment suggests a grim inversion of that wisdom. The engines of wealth in form of trade, energy and cooperation are being throttled by the very political impulses that once depended on them.

The latest Gulf conflagration, involving Iran, Israel and the United States, is a stress test of the global economic system itself.

The immediate theatre of conflict may be the Middle East, but its consequences are planetary. In an age of dense economic interdependence, geography still matters—especially when it narrows into chokepoints. The Strait of Hormuz, through which roughly a fifth of global oil consumption passes, is one such artery. Its disruption has sent tremors through markets, industries and households alike. When oil tankers hesitate and insurers balk, the effects are felt not only in Tehran or Tel Aviv, but in Mumbai, Berlin and Shanghai.

History offers ample warning. Wars have always been economic earthquakes. The first world war shattered the liberal trading order of the 19th century; the second required a wholesale reconstruction of global finance and governance. But the present crisis disrupts a system far more integrated than anything that came before. Supply chains stretch across continents, financial markets react in milliseconds, and energy flows underpin virtually every sector of modern life.

Energy Shock

The most visible impact has been in energy markets. Oil prices, already volatile, have surged in response to fears of prolonged disruption. Analysts warn that prices could climb further if hostilities intensify or if the Strait of Hormuz is effectively closed. Liquefied natural gas (LNG), a critical input for both industry and households, has also been affected. Major suppliers such as Qatar and the United Arab Emirates face operational constraints, sending prices soaring in Europe and Asia. Inflation, which central banks had hoped to tame after the pandemic, is once again threatening to entrench itself.

Yet energy is only the beginning. Modern economies are intricate webs in which disruption in one node cascades across the system. Aviation is a case in point. Airspace closures across parts of the Gulf have forced airlines to reroute or cancel thousands of flights, raising costs and complicating logistics. Shipping, too, has been affected. With key routes deemed unsafe, vessels are diverting around the Cape of Good Hope, adding weeks to transit times and inflating freight costs. The result is a familiar but unwelcome phenomenon: rising prices for everyday goods, from food to textiles to construction materials.

For the developing world, the consequences are particularly severe. Many countries in Asia and Africa are heavily dependent on imported energy. As oil prices rise, their import bills swell, currencies weaken and fiscal deficits widen. Welfare programmes, already under strain, face cuts or stagnation. The lofty ambitions of global development, from eradicating hunger to expanding education, are pushed further out of reach.

The Gulf economies themselves are not immune. Despite their hydrocarbon wealth, many remain structurally dependent on imports for food and other essentials. Disruptions to desalination plants and supply chains threaten basic necessities, including drinking water. The region’s economic diversification, painstakingly built over decades, faces a stern test.

The shockwaves extend to the industrial heartlands of the world. Europe, still grappling with the aftermath of Russia’s invasion of Ukraine, faces the prospect of a second energy crisis. Industries reliant on stable and affordable energy like chemicals, steel and manufacturing could face shutdowns or reduced output. Asia’s major economies are similarly exposed. China, the world’s largest importer of Middle Eastern oil, must navigate supply uncertainties even as its domestic growth slows. Japan, which depends on the Gulf for the overwhelming majority of its crude imports, confronts the risk of shortages, rising costs and financial instability.

Volatile Markets

Financial markets, ever sensitive to uncertainty, have reacted accordingly. Volatility has spiked, equity markets have wavered, and investors have sought refuge in safer assets. Central banks find themselves in an unenviable position: raise interest rates to combat inflation and risk stifling growth, or ease policy and risk fuelling price rises. The delicate balance that policymakers have sought to maintain since the pandemic is becoming increasingly difficult to sustain.

Some estimates suggest that a prolonged conflict could shave several percentage points off global GDP. That may sound abstract, but its implications are concrete: slower growth, higher unemployment and reduced living standards. The comparison with past crises like the oil shocks of the 1970s or the Great Depression of 1929 is instructive.

Leadership, in such moments, matters enormously. After the devastation of the second world war, Franklin D. Roosevelt and his contemporaries laid the foundations of a new global order, from the Bretton Woods institutions to a renewed commitment to multilateralism. Today, however, the political landscape appears less conducive to such cooperation. Institutions such as the United Nations struggle to assert authority, while major powers pursue divergent and often conflicting interests.

The actions of individual leaders have also shaped the trajectory of the crisis. Donald Trump’s approach to the Gulf, marked by assertiveness and unpredictability, has contributed to the escalation. Meanwhile, Vladimir Putin’s war in Ukraine serves as a cautionary tale of how strategic ambition can devolve into protracted conflict with severe economic consequences. In both cases, the absence of clear exit strategies has prolonged instability and amplified its costs.

Beyond the abstractions of GDP and inflation lie real lives disrupted and livelihoods destroyed. Migrant workers in the Gulf face uncertainty as economic activity slows. Remittances, a vital source of income for countries such as India, are at risk. Food security, already fragile in many regions, is threatened by rising prices and supply disruptions.

India’s Strategy

India’s position in this unfolding drama is instructive. As a major importer of Middle Eastern oil, it is vulnerable to price shocks. Yet it has also taken steps to diversify its energy sources, sourcing crude from a wider array of countries. Such strategies provide a measure of resilience, though they cannot fully insulate the economy from global trends. Inflationary pressures, currency fluctuations and remittance risks remain significant concerns.

Globalisation, for all its benefits, has created new vulnerabilities. When a critical node like the Strait of Hormuz is disrupted, the effects cascade across the system. The assumption that trade flows will remain uninterrupted, long a cornerstone of economic planning, now appears increasingly tenuous.

What, then, is the way forward? The most immediate priority is de-escalation. Even a temporary ceasefire would provide relief to energy markets and restore a degree of confidence. Beyond that, structural changes are necessary. Diversification of energy sources, investment in renewables and the development of alternative trade routes can reduce dependence on vulnerable chokepoints. At the same time, global institutions must be reformed to better reflect the realities of a multipolar world.

There is also a need for a renewed commitment to diplomacy. The absence of credible diplomatic channels in the current crisis is a glaring deficiency. Dialogue, however difficult, remains the only sustainable path to peace.

In Indian thought, the concept of Vasudhaiva Kutumbakam (the world as one family) captures an ideal of shared destiny. Yet families, like nations, require trust and cooperation to function. Without them, interdependence becomes a source of vulnerability rather than strength.

The danger today is not merely of an economic downturn, but of a deeper unravelling. A world divided into competing blocs, with fragmented supply chains and diminished trust, would be poorer in every sense. The Gulf crisis, in this light, is both a warning and an opportunity: a warning of the costs of conflict, and an opportunity to rethink the foundations of global economic order.

(The writer is a foreign affairs expert. Views personal.)