Middle East crisis: Global economy faces historic energy shock
The ongoing conflict in the Middle East has triggered the most significant supply disruption in the history of the global oil market, according to the International Energy Agency (IEA). With energy infrastructure under fire and vital shipping lanes through the Strait of Hormuz obstructed, the implications for global energy security, affordability, and the broader world economy are profound.
Since the outbreak of hostilities on 28 February, trade flows through the Strait have been severely impeded. This bottleneck has already removed approximately 20% of the global supply of liquefied natural gas (LNG) from the market. The IEA’s Executive Director has described the situation as "the greatest threat to global energy security in history."
The figures are stark. Crude and oil product flows through the Strait have collapsed from roughly 20 million barrels per day (mb/d) before the war to a mere trickle. With limited alternative routes and storage facilities reaching capacity, Gulf producers have been forced to slash total production by at least 10 mb/d. Unless shipping flows resume rapidly, supply losses are expected to mount. While the IEA forecasts global supply to rise by 1.1 mb/d in 2026, driven entirely by non-OPEC+ producers, this increase offers little immediate relief to the current deficit.
Beyond the pumps, the closure of the Strait poses a systemic threat to global food security. More than 30% of the world’s urea trade, and roughly 20% of ammonia and phosphate trade, passes through these waters. The resulting volatility in fertiliser prices creates a direct risk to food costs. Furthermore, the region accounts for 8% of global aluminium production, vital for construction and energy technologies. The disruption of these commodities, alongside helium and natural gas, is amplifying inflation risks across Asia and key emerging markets.
Market reactions have been swift and aggressive. Brent crude futures surged by more than 60% in March alone, mirrored by a 60% rise in the Dutch TTF, the European benchmark for natural gas. In Asia, the prices of diesel and jet fuel more than doubled over the same period.
For central banks, the primary concern is that these surging energy costs will bleed into "secondary effects." While Eurozone inflation rose to 2.5% in March from 1.9%, this was largely an energy-based spike. The danger lies in producers passing these costs on to consumers, embedding inflation into the prices of general goods and services.
Policymakers are currently treading a fine line. Most central banks are monitoring the "pass-through" of the shock before committing to rate hikes. However, their patience has limits; the tilt towards tighter monetary policy will sharpen as inflation expectations firm. In the United States, the Federal Reserve is grappling with a dual mandate under pressure: mounting inflationary concerns, having remained above target for five years, balanced against lingering fragility in the job market.
The impact is being felt acutely in South Africa. Higher oil prices are expected to push domestic inflation from 3.5% to a peak of 4.3% in April, before it potentially eases to 3.4% by late 2026. Consequently, the interest rate cuts previously anticipated for this year will likely be deferred until 2027. The South African Reserve Bank (SARB) faces the difficult task of anchoring inflation expectations, particularly regarding wages. If the labour market responds with higher pay demands to catch up with the cost of living, a "wage-price spiral" could keep inflation stubbornly high for years, a scenario central banks are desperate to avoid.
The financial fallout in March was significant. The South African All Share index tumbled 10.5%, while the All-Bond index fell 6.8%. The Iran crisis triggered the largest weekly outflow from the South African bond market since 2019, as foreign investors liquidated R41.3 billion in government bonds. Global markets saw similar pain, with the S&P 500 losing 5% and US 10-year bond yields climbing 38 basis points.
A recently announced two-week ceasefire between the US and Iran has offered a tentative "off-ramp" for the conflict, providing a brief reprieve for jittery markets. However, the path to a durable peace is fraught with difficulty. The ceasefire remains fragile, and even in a best-case scenario, shipping and energy production will recover only slowly.
With physical supply constraints likely to persist for months, the downside risks to 2026 growth remain high. Heightened policy uncertainty and market volatility are now part of the structural landscape. Investors must now weigh whether the current market returns sufficiently compensate for a geopolitical risk profile that shows no sign of returning to pre-war "normality" any time soon.
Tega Shiimi ya Shiimi is the Chief Executive Officer for SanlamAllianz Investments.
