Hey everyone, it's Richard. You're watching The Plain Bagel. Following months of growing tensions and years of strikes being exchanged, the US and Israel carried out a joint attack on Iran this past Saturday, dubbed Operation Epic Fury. Uh the stated goal of the attack was to eliminate the imminent nuclear threat posed by the Iranian regime, destroy its ballistic missile arsenal, degrade its proxy terror networks, and its navy forces. However, with the strikes also killing the country's supreme leader Ayata Ali Kam and Trump calling on the people of Iran to overthrow their government, despite Pete Hegsth pointing otherwise, it seems pretty clear that the intent here is a complete regime change for the country. And while the initial attack from the US was very swift, the conflict has very quickly escalated throughout the region. with Iran launching a number of attacks against neighboring countries, particularly ones hosting US troops, and Trump suggesting the military operation could last four to six weeks. Now, in addition to debates over the attacks, with many weighing the oppressive and deadly force that Iranian regime has been in the region with the civilian casualties we've already seen caused by the US strikes and the general unstable nature of the region. One of the stories we've seen many outlets covering with this update is how disruptive this conflict might end up being for the global economy, which naturally in the face of the horrors of war is not a key priority here. But there is expected to be a fairly far-reaching implication from the conflict that we're seeing, which might be surprising for some. Iran is, after all, a fairly isolated country. It was up until 2022 the most heavily sanctioned country in the world until it was replaced by Russia following the invasion of Ukraine. And the country has long operated as a bit of a hermit in the region. So most would probably anticipate pretty limited economic fallout from a war in the country. But that's actually far from the case. So today we'll go over the risks the conflict in Iran poses to the global economy and why economists are bracing for pretty farreaching impact here. Uh not to make light of the other more horrific aspects to this development, but as an economics and finance channel, I think it's worth diving into the implications here and why people who are even far removed from the region might see an impact. Now, Iran, as mentioned, is a fairly economically isolated country uh thanks to the slew of sanctions it faces from developed nations. The country, an authoritarian theocracy, was first designated a state sponsor of acts of international terrorism by the US back in 1984 with the country being a key backer of groups like Hamas and Hezbollah. And while the country did sign a deal, the joint comprehensive plan of action or simply the Iran nuclear deal for short, back in 2015 to have some sanctions lifted in exchange for the reigning in of its nuclear development programs. The US itself pulled out of the deal in 2018 while the United Nations found Iran in non-compliance back in 2025, leading to the reimposition of restrictions with there long being concerns that Iran is secretly developing nuclear weapons. Now, while the UN has focused on more targeted sanctions, freezing assets for certain individuals and organizations, and restricting nuclear and weapons development, the US has been more broad with its restrictions, forbidding nearly all trade, financial transactions, and investments in the region beyond actions authorized directly by the government with humanitarian exceptions only granted for a select few products like food and medicine. This, combined with Iran's reliance on oil, has made the country's economy fairly volatile. Despite Iran having double the population of Canada, for example, its economy is roughly 1/5if Canada's size when measured in gross domestic product, with exports likewise being a fifth of Canada's own. Nonetheless, Iran has remained a key supplier in the very important market of energy, in particular, crude oil. Uh you see Iran actually produces about 4% of the world's oil with the country hosting the third largest oil reserve in the world making up about 12% of global reserves. And while some of the sanctions against Iran restrict the country's ability to sell this oil, the country has been able to continue shipping the product thanks to sophisticated black market channels it's developed over time. With the country sending the vast majority of its oil exports, over 80% to China, making it the second largest source of crude for the country with an estimated 520 million barrels being sent to China in 2025. Because of this, any conflict with Iran has historically translated into a jump in oil prices on the expectation of supply tightening up. And this circumstance is no different. In fact, with the attack from the US and Israel, we've seen the West Texas Intermediate reach nearly $90 a barrel, up over 30% over the span of a week, while the Brent crude index has risen 25% to $91 a barrel. But it's not actually the impact to Iran's own oil sales that's primarily contributing to surging prices here. While that certainly plays a role, most people have been pointing to another more far-reaching variable here, the straight of Hormuz. You see, the street of Hormuz is a vital waterway that connects the Persian Gulf to the Gulf of Oman. It's where many of the world's largest oil producers, including Saudi Arabia, the United Arab Emirates, and Iran itself, send out their oil to international markets. In fact, about 31% of all seaborn crude and about 1/5if of global crude oil passes through the strait on a daily basis. So, you can see how important the waterway is to global oil markets. and Iran happens to border the straight on the northern side, including the passageways most narrow choke point at just 33 kilometers wide. So, there's long been this concern that Iran could cut off the world from about a fifth of its total oil supply. And on Monday, we saw that risk become reality when the Islamic Revolution Guard Corp announced that they would be closing the straight, warning that it would set any vessel attempting to pass through ablaze. with eight vessels having already been struck in the straight and a number of shipping companies suspending all vessel transit and anchoring ships to avoid attacks, effectively killing transit in the channel and leaving hundreds of ships stranded. So, right away you can see why some are forecasting a pretty meaningful economic impact from the conflict in Iran. Uh while it's true that about 84% of the crude oil and condensate that comes from the strait is sent to Asian countries including China, India, Japan, and South Korea, oil prices will likely rise globally if the closure is maintained as these countries turn to other markets for their supply with a Kona a senior portfolio manager with Newberger Burman warning that a disruption lasting over a month could send prices well into the triple digits, something we haven't seen since 2022. As you might be aware, oil has a fairly broad impact on global economic activity. Uh oil is used for everything from electricity generation and fuel to the production of a slew of end products and compounds. So beyond the direct impact we can see on things like gasoline prices, any increase in oil's price tends to reverberate across a slew of production chains. Not to mention that as fuels become more expensive, it becomes more expensive to ship and transport goods. uh so even products not directly derived from petroleum could still see a meaningful price impact. Now importantly we have to mention that there are alternatives to the street of Hormuz for transporting Middle Eastern oil to international markets. As you can expect the closure of the street has long existed as a threat to the region given Iran's history and instability. So nations have put effort into developing alternative export routes. Saudi Arabia, for example, has pipeline capacity for 5 million barrels per day that can reach the Red Sea, with this covering most of the oil the country exported through the strait in February, while the UAE has infrastructure that reaches the Gulf of Oman directly. So, it's unlikely we truly see 20% of the world's oil supply just disappear here. However, with the Red Sea, there's risk there as well, given that we've seen Houthi rebels based in Yemen strike freight vessels in the past, with that group notably being backed by Iran. The current conflict has seen some critical infrastructure damaged in the region, including refineries, oil storage, a fuel tank terminal, and Oman's port of Duke with Ryside Energy estimating that even with these alternatives available, we could still see crude oil supply drop by 8 to 10 million barrels per day, equivalent to nearly 10% of global supply. So, there's still likely to be a very meaningful impact. And even beyond oil, there are a number of other disruptions that pose threats for the global economy. Uh the straight is also a key passageway for liqufied natural gas which itself is used for heating, electricity and generally as a fuel. Uh so disruptions to that commodity will likewise translate into similar impacts with natural gas futures prices having already jumped over 60% in European markets. We also see about a third of the world's ura a key nitrogen-based fertilizer flow through the passageway. So this could also have a direct impact on food prices with that commodity having seen its price jump 25% since the initial attack. The conflict has also disrupted air travel with flights being cancelled amid airspace closures in the Middle East and marine insurance companies have already sought to cancel coverage for war risks related to Iran. An issue likewise faced by airline companies which are now experiencing a gap in their coverage. Something that's likely to discourage companies from operating in the region if they can't get protection from these catastrophic risks. With tanker prices already jumping internationally on the disruption in the region. And when we look to neighboring countries in the region, we of course can expect much more acute pressures. Many of the Gulf countries have nationalized their oil production, meaning that any impact to their ability to export oil directly decreases government revenue, which naturally has broad-reaching impacts for the country as a whole. On top of this, war in general tends to contribute to capital flight, weaker economic activity, and higher inflation for nearby countries. And as risks for operating in a region increase, it's more likely to discourage that economic activity. This is especially true for industries like tourism, which some Gulf countries are fairly reliant on. The UAE, for example, derives 14% of its GDP from the industry. And then there's, of course, the more direct risk of capital impairment. A risk again we're already seeing play out to an extent with Saudi Aramco, for example, Saudi Arabia's state-run oil producer and the largest oil company in the world, having itself been targeted by drone strikes, albeit with seemingly no damage to its infrastructure. So from the acute impact to the region to the more far-stretching inflation implications and trade disruptions, a war in the region is likely to be highly disruptive to the global economy, even with Iran's isolation. And if the conflict stretches longer than anticipated, these impacts could naturally be quite meaningful. Using the Keel Institute's price of war calculator, for example, which uses 2023 data and assumes an average war that lasts 3.5 years, we can see that a war in Iran could cost the country nearly $1 trillion in lost capital, nearly $600 billion in lost GDP, and cause the economy to contract over 30%. All over a 5-year period, while other countries could cumulatively see a GDP loss of over $1 trillion. Now, importantly, that's a very crude estimate that assumes things escalate far beyond what we're currently seeing. But given the history of Middle Eastern conflicts stretching well beyond their initial scope, it is a risk that's faced here. Now, when it comes to the impact on the US specifically, there's long been this view that war is actually good for business, as evil as that sounds. Uh, namely because the government tends to increase spending during geopolitical conflicts and because the US is very far removed from the devastation of these types of engagements. Some hold the view that economic activity thrives during wars and certainly we have seen periods in history of GDP growing strongly during major conflicts and certain players will benefit from the current war. However, even with America's privileged position, there's still some meaningful negative consequences to its economy from these types of engagements. For one, US inflation tends to spike during geopolitical conflicts in part from this higher government spending. something that will obviously be more pronounced here given the impact on the oil market and the broad disruptions to trade uh with freight rates likely to surge and trade volumes likely to decrease. This may also lead to an increase in interest rates. The Federal Reserve is still grappling with the impacts of tariffs on price levels and may have to switch to hiking rates should we see a new inflation risk. And while US Treasury bond yields tend to decrease during geopolitical conflicts as investors buy the asset as a safe haven investment to protect their money, we've so far actually seen yields increase slightly with fears over inflation seemingly offsetting this factor. Finally, we tend to see US debt increase during wars again because of that heightened spending, which could prove problematic given the pressure on interest rates and the lost tariff revenue the White House experienced last month from the Supreme Court's ruling that Trump's AIPA tariffs were illegal. I also won't spend a tremendous amount of time on stocks given the nature of the situation. But it is worth noting that while certain sectors of course experience a range of impacts during geopolitical conflicts in the short term, US stock market valuations in general haven't historically exhibited a direct relationship with geopolitical conflicts over the long term according to the Institute of Economics and Peace. And while stocks do tend to experience a sell-off in the short term, returns tend to normalize thereafter with performance often dominated by other variables. All to say, it's not usually wise to trade off of short-term geopolitical headlines if you're investing for the long term, especially given that we just don't know how things will ultimately settle. But that's the economic situation with Iran as it's currently been assessed. Given that this is a developing story, obviously many factors are going to be changing here. The US, for example, has already highlighted that it will provide insurance and escort ships through the Gulf to combat Iran's closure of the strait. So, while that likely won't offset the full impact, that is certainly something that could lessen the blow. And we could see other factors depress oil prices from here. OPEC plus, for example, the Organization of Petroleum Exporting Countries, plus other group participants, recently opted to raise oil production by over 200,000 barrels per day and could easily push this level higher should pressure on supply continue. So, while the group includes many of the Gulf countries impacted by the war here, some other nations may be able to bolster supply amid the conflict. We also, of course, have no concept of how long this conflict might last. We could see other countries pulled into this like Russia and China who is an important lifeline for Iran. Alway countries while denouncing the attacks have so far avoided intervening. But if history is any precedent, it's likely we do see things stretch out for some time. And even if the Iranian regime is taken down, there's the risk of a power vacuum forming and other violent groups taking control. So 4 to 5e frame does seem fairly optimistic. Nonetheless, we'll just have to wait and see how things develop from here. Uh thanks for watching. I hope you found this video helpful. If you did, please do make sure to like, subscribe, all that good stuff. It does help the channel tremendously. And if you're interested in learning more about how war generally impacts economic activity, I'll link to a video that I put out last year on that topic that you can check out. Thanks again for joining. See you in the next one.