The article was first published on OMFIF on March 25th, 2026.

Mark Sobel is Vice Chair and Chief Economist at OMFIF.

A durably harmed America and more irreparable harm to the rules-based order

Economists are filling the news pages with a consensus view – how sustained the Iran war will be is unknown and until more information is gathered on whether it ends soon or persists, the fallout on oil prices and the economy cannot be readily gauged. That is a fair view insofar as it goes, but it doesn’t go far enough. Despite President Donald Trump’s declaration that ‘very strong talks’ are now taking place between the US and Iran, there are good reasons to believe the fallout will be higher for longer and extend far beyond energy prices. Policy-makers should be preparing these longer-lasting contingency scenarios.

The US and Israel have already significantly crippled and demolished Iran’s military capabilities. But as many military analysts observe, one cannot decapitate the Iranian regime from the air and the regime has deep tentacles throughout society which make regime change highly unlikely. Assassination of existing leadership may also serve to perversely radicalise and empower hard-liners further.

Though enfeebled, the military and Islamic Revolutionary Guard Corps still have enough munitions to deploy drones and missiles throughout the Middle East and threaten the Straits of Hormuz. Iran has proxies in the Houthis and Hezbollah that can stir up guerilla-like actions and woes throughout the Middle East. These fear factors alone will allow Iran to imperil flows through the Straits not only of oil, but also raise the spectre of snarled supply chains and inflation from other materials such as fertiliser for a while. Iran’s neighbours have seen their production capabilities hammered and, in some cases, shut in. Meanwhile, Iranian oil continues to flow through the Straits.

‘Unpopular war’

Trump may want to extricate himself from his unpopular war as gas prices in the US surge, inflation concerns rise and Republicans increasingly fret the midterm elections. But even if weakened, Iran’s continued ability to wreak havoc throughout the Middle East does not offer an easy face-saving path for him to declare victory and find an off ramp.

And, even if Trump soon pulls out of the war,  that doesn’t mean Israel stops some of its campaigns nor that Iran suddenly becomes well behaved. In short, the Straits of Hormuz and its surroundings are highly unlikely to soon return to normal activity any time, even if a significant portion of the pre-war average 20m barrels per day oil flows out. An uncertainty and political risk will be embedded. Oil prices will remain elevated – $60 per barrel oil will not be seen again anytime in the future.

The global economic fallout will be more serious than initially thought. Many highly energy-dependent nations in Europe, Asia and Africa will see growth fall and inflation surge. Fiscal positions will worsen. Central banks will have to be vigilant, guarding against second-round effects and perhaps keeping rates higher than otherwise. The fallout, though, will be less for the US. But for the rest of the world, a key question will be whether stagflation returns.

Knocks to world economy

It doesn’t stop with oil. Liquified natural gases are up more than oil, which will be a major blow to the European economy. The spread between Brent and West Texas Intermediate oil has widened, proving tough for Europe. The European Central Bank may no longer remain ‘in a good place’ throughout the year. The Bank of Japan’s already excessively accommodative monetary policy is facing more acute risks on the growth and inflation front, exacerbated by a weakening yen. China too is energy-dependent but has built up strong reserves and can fall back on coal.

In the most unfortunate of unintended consequences, the self-inflicted extreme pain facing the Russian economy will be somewhat lessened. It will be able to finance its barbaric war against Ukraine a bit more readily.

Meanwhile, an energy-independent US will be the least economically affected. Growth and inflation could be hit by up to 0.5%, according to many economists. But energy independence and fiscal support will lessen the decline in growth relative to others. The fiscal deficit will worsen – especially because a defence supplemental of up to $200bn is being sought by the Pentagon from the  White House.   But the US has stopped worrying about red ink, acting like an ostrich with its head in the sand while awaiting a budget crisis down the road. Expectations of a near term Federal Reserve easing have been put on hold.

Nonetheless, in other respects, the US is the biggest loser of them all. Trump didn’t consult the allies who he is now asking to help out, nor do they view this as a war they support. They trust Trump even less now, if that is imaginable. Despite longstanding transatlantic unity and partnership, they have brutally rebuffed Trump, who is now further enflaming the situation by calling Nato into question. The US is no longer seen by Europe as a trustworthy and reliable partner, and no matter what happens in 2028, there will be no way to fully go back.

The Iran war is sending reverberations throughout the global economy that will take a long time to quell. The damage to the already disturbed foundations of the global rules-based order goes still deeper – with consequences that may well be irreparable.