Global economic implications of the 2026 Middle East war

Warwick McKibbin, Marcus Noland and Geoffrey Shuetrim
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Geoffrey Shuetrim: McKibbin Software Group Pty Ltd.

No WP26-10, Working Paper Series from Peterson Institute for International Economics

Abstract: This paper explores two scenarios for the potential economic effects of a Middle East war that causes a spike in energy prices. In the first, oil prices surge for one year to around $120 per barrel, while prices also rise sharply for liquefied natural gas, refined petroleum, and fertilizer; in the second, energy prices remain elevated for three years. We find in both scenarios, global growth slows relative to our baseline projection, but the effects are felt very unevenly. Countries dependent on Middle Eastern oil, petroleum, natural gas, and fertilizers experience the largest declines in GDP and increases in inflation. The effects on different sectors vary according to their energy sources, both directly through different energy dependence and indirectly through production networks. Also, trade relationships matter because as the global economy slows, countries such as China experience a decline in export demand, worsening GDP losses, even though China has large domestic supplies of oil, gas, and fertilizer.

Keywords: Iran; Middle East; oil prices; war. (search for similar items in EconPapers)
JEL-codes: C6 F51 Q34 Q43 (search for similar items in EconPapers)
Date: 2026-06
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