APRIL 2026
The chart below shows why the Middle East war is having such a profound impact on the world economy and markets. Saudi Arabia alone accounts for over 10% of global oil production with Iran, Iraq and the UAE collectively underpinning much of the remainder of the world’s daily supply.
At the time of writing, the conflict has removed more than 6 million barrels per day of oil supply from the market with logistical headwinds proving to be as challenging as the production cuts themselves.
The Strait of Hormuz (through which roughly 20% of global oil and a significant share of LNG flows) has been severely constrained, leaving most of the Gulf’s energy supply effectively stranded.
The key takeaway is that the global energy system remains overly reliant on a narrow set of producers and a single critical chokepoint. When that system is disrupted, the consequences are swift, global and difficult to offset.
Higher energy prices act as a tax on consumers, squeeze corporate margins and tighten financial conditions; all of which lead to slower economic growth and a possible recession.
The chart below shows how this relationship has played out repeatedly over the past 40 years with the notable exception of 2022.
Oil prices surged following the start of the Russia–Ukraine conflict, four years ago, but the US economy managed to avoid a formal recession thanks to strong post-pandemic momentum and significant fiscal support.
The US has also become a major energy producer over the past decade, helping to offset the negative income shock seen in prior cycles.
This all means the US economy may yet avoid a nasty downturn in the face of the prevailing energy crisis. Much will depend on how the Federal Reserve and the bond markets react to the prospect of a sustained inflationary shock.
The UK economy remains extremely vulnerable to global energy price shocks.
While domestic production still plays a role, the system is heavily reliant on imported energy so global wholesale prices effectively set the marginal cost of both gas and electricity.
Even modest disruptions in global energy markets can feed directly into UK inflation.
The 2022 energy crisis was a prime example with a peak 90% y/y increase in gas and electricity prices sparking a surge in headline UK CPI and borrowing costs.
The current spike in energy costs has yet to fully hit consumers thanks to Ofgem’s April price cap being set before the Middle East conflict began. The real impact is likely to emerge in the July reset, where forecasts already point to a significant rise in household bills.
In effect, the UK is facing a familiar lagged shock; energy prices move first, the price cap follows and inflation responds thereafter.
The key point is structural.
For as long as UK energy prices remain tied to global gas markets, geopolitical shocks abroad will continue to translate into economic volatility at home.
Global military spending was already at an all-time high before the latest escalation in the Middle East. Rising US–China tensions, the Russia–Ukraine war and a general increase in geopolitical unrest have driven a sustained increase in defence budgets across both developed and emerging markets.
NATO has been a key catalyst. Under pressure from President Trump, the long-standing target for NATO members to spend 2% of GDP on its military is shifting towards 5% by 2035.
The latest Gulf conflict is likely to accelerate this trend further.
Beyond the immediate costs of conflict, countries across the Middle East will need to replenish depleted stockpiles, upgrade missile defence systems and invest in more advanced capabilities.
This points to a sustained increase in defence spending over the coming years.
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