The financial markets have no special insight into the likely course of the conflict which has followed last weekend’s US/Israeli attacks on Iran. But the warning signs now flashing in energy and share markets are a logical response to the risks ahead.
As well as the spread of the conflict, its duration will be the vital determinant of the extent of the economic impact. A short interruption to energy supplies would not be of any great consequence. A longer term one most certainly would be.
The inability of oil and liquefied natural gas (LNG) shipments to move through the Strait of Hormuz, which now appears largely closed due to Iranian threats, is now a central part of the story. There are also concerns about the danger to energy infrastructure following Iranian attacks on a Saudi oil refinery and a Qatari LNG facility, forcing production to stop at the latter.
Oil and gas prices have risen as a result and share and bond markets are nervous. Depending on how events develop, there are also concerns about the need to reroute general shipping, potentially affecting a whole range of products, and also about disruption to air transit. The airline and travel trades are also clearly exposed, with hundreds and thousands of travellers now caught up in delays and cancellations.
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The economic cost is very much a secondary concern to the huge human cost of the spreading war. But it is real, nonetheless. And it may conceivably play into the political decisions in the weeks ahead, particularly in Washington where higher fuel prices could add to public and political concern about Trump’s decision to get involved in the first place. The US will also face pressure from Middle Eastern allies and those around the world if the war drags on.
For Ireland, despite our distance from the conflict zone, the dangers are the same as for other developed countries. Higher oil prices will hit at the petrol pumps and on home heating bills, even if there is no justification for companies which have jumped the gun by implementing significant increases already.
However, the bigger cost would come from a sustained rise in gas prices, which would affect businesses directly and also, crucially, push up the price of electricity production. In turn, this would add to the political debate about supports for households facing higher energy costs.
Having survived a series of economic shocks over recent years – from Covid and the inflationary spike that followed the Russian invasion of Ukraine – Ireland may now face another one. With some budgetary room for manoeuvre and a strong recent record of growth, the Irish economy is in better shape than many others to deal with this. But as a small trading nation, the State is also exposed. A crucial few weeks lie ahead to determine the economic outlook for 2026.
