A Prolonged Hormuz Disruption

Iran’s Foreign Minister Abbas Araghchi published a Financial Times commentary on 22 October : ‘Iran seeks a just and honourable deal with the US. To achieve that outcome, the White House must demonstrate seriousness and a genuine will to permanently end its aggression.’ He urged the US to adhere to the Memorandum of Understanding agreed by Trump and signed in June at Versailles. He warned, ‘Any further escalation around the Strait of Hormuz or elsewhere in the region will put civilian lives and the wellbeing of all regional states and the global economy at great risk.’

A day later the Financial Times headlined an interview with US Ambassador to the United Nations Mike Waltz, US is prepared for long stand-off with Iran, says Trump envoy. It notes a war projected for weeks now nears nine months, bringing record high distillate prices, with fertiliser and commodities shortages threatening famine and industrial supply chain disruption. Waltz confirmed to the FT that a year from now the US could still be in a stalemate with Iran: “The president and the US Navy can maintain this blockade for the foreseeable future.”

Assuming a long war in the Persian Gulf, what are the implications, who is most exposed, and what are reasonable policy options to mitigate the harms?

The most obvious cost of an escalation in the war would be energy price spikes, crude oil heading back up toward the $126 per barrel spring peak. Natural gas, LNG, and fertiliser costs will rise with oil.

Secondary effects of war are already worrying. VLCC tanker rates have already risen tenfold over pre-war rates, nearing 40% of the price of each barrel delivered. While some tankers returning to service have relieved vessel shortages, war time risk insurance, congestion around the Persian Gulf, less efficient ship-to-ship loading to bypass Hormuz, and rerouting to avoid Red Sea transits have all contributed to higher shipping costs.

Less obvious harm comes from stress in debt markets. Rising energy prices are inflationary, leading to more restrictive monetary policy, possibly higher policy rates. As inflation expectations surge with energy costs, central banks will delay interest rate cuts, depressing asset markets and compounding global debt servicing burdens and refinancing risks globally. The BIS has highlighted how government debt is growing relative to GDP while private debt contracts, a sign of economic stagnation. Public debt grew from 74% of GDP to 93% of GDP between 2009 and 2025, before the current Persian Gulf war increased stresses on fiscal capacity.

The Persian Gulf economies – Iran and the Gulf Cooperation Council – are obviously most at risk, having already suffered 11% to 17% collapses in GDP. If Iranian infrastructure strikes resume on oil and gas production complexes, it could be years before production recovers. Many of these states have borrowed heavily to finance development and investments in AI and other sectors, and that debt now faces increased risks.

Import dependent Japan, South Korea, Taiwan, and Philippines are the most exposed to long war supply shocks, industrial strain, and worsening fiscal imbalances. The Global South already faces a fertiliser shortage and refinancing risk as debts roll to higher interest loans.

Mitigations and interventions to blunt the shocks should already be planned, if not implemented. Saudi and UAE are expanding crude flows overland through the East-West Pipeline to the Red Sea port at Yanbu, bypassing Hormuz. The port facilities and pipeline have been repeatedly struck by Ansar Allah as hostilities with Saudi resumed, making the volumes unpredictable. Ansar Allah claimed to have struck and disabled the East West Pipeline again over the weekend.

US, Canada, Brazil, and Guyana are expanding production and pipelines to weaken impacts of the Gulf bottleneck. Yesterday President Trump signed Executive Order 14156 (Declaring a National Energy Emergency) and a presidential memorandum under Section 303 of the Cold War Defense Production Act. The effect of these instruments is to treat oil production and refining as critical infrastructure essential to national defence. The directive frees up federal funding for subsidies and loans, forces the restart of closed refineries, and waives regulations that could delay action. As highlighted last week, the bilateral diesel deal struck by Presidents Trump and Putin was also an urgent measure to relieve energy supply deficits. The first tanker, Anatoly Kolodkin, carrying 40,000 metric tonnes (326,800 barrels) of Russian diesel is already on its way to New York, expected 7 November, under a deal for ‘immediate’ shipment of 300,000 tonnes.

The Global South faces the most desperate double-squeeze from energy and fertiliser shocks. Immediate fiscal stability and long-term food security threaten the prospects of import-dependent developing economies. Mitigations being explored or implemented include:

• Bilateral commodity swaps to preserve foreign exchange reserves;
• Urgent food security/domestic agriculture initiatives to reduce food imports;
• Government-to-government purchasing agreements to lower trade finance risks;
• Subsidy diversion from fuel to fertiliser to protect farmers;
• Bio-fertilisers and precision-farming techniques to reduce imported fertiliser;
• Diverting fertiliser supply chains to alternative producers Morocco, Canada, or African hubs;
• Localised power or fuel rationing and restricted hours for commercial operations;
• Swapping costly USD debt into less costly RMB Dim Sum debt.

Sovereign debt markets in both Developed Economies and EMDEs are already destabilising, with G7 yields surging. As nations borrow more heavily than budgeted or deplete foreign exchange reserves to maintain fuel and food imports, a long war means greater stress in debt markets. Capital flight can send sovereign bond yields to distress levels (1000 basis points above US Treasuries). Refinancing becomes problematic, and for the worst affected credits, potentially impossible. Currency depreciation amplifies the cost of servicing US dollar debts, triggering an inflationary loop.

A long war in the Persian Gulf threatens global economies everywhere. As of today few can foresee a military or diplomatic conclusion any time soon. Governments, businesses, and peoples of the world must face up to the challenge of identifying, measuring, and mitigating the harms.