The lingering energy shock is morphing from the Asian epicenter to a global economic drag. The US/Israel war imposes a costly penalty on global growth.
THE probability of escalation has fallen, but the durability of any agreement will depend on whether the ceasefire can evolve into a broader settlement on Iran’s regional role and nuclear activities.
Energy-importing Asia remains the principal loser. Commodity exporters retain partial gains. The Gulf states themselves have become the greatest reminder that geopolitical instability can transform apparent beneficiaries into long-term economic casualties.
The world faces a prolonged period of elevated energy costs, fragmented trade routes, higher insurance premiums, supply-chain restructuring and slower productivity growth.
Global Economic Impact Sources: IEA, IMF/WEO, World Bank, WTO, national and media reports, author’s assessment
US: Resilient but increasingly stagflationary
The United States is better positioned than most advanced economies because of domestic energy production and AI-led investment. Yet, higher fuel, petrochemical and transport costs are already feeding through the economy.
Gasoline prices remain well above pre-war levels, while energy-intensive industries face sustained cost pressures.
Growth is likely to remain positive through 2027, but below pre-conflict expectations. Inflation may prove more persistent than policymakers anticipated.
By targeting Iran’s strategic capabilities while expanding military deployments across the region, the US has contributed to a prolonged risk premium in global energy markets — including its allies in Europe, Japan, South Korea and the developing world.
China: Economic exposure, strategic beneficiary
As the world’s largest energy importer, Beijing remains vulnerable to disruptions in Gulf oil and LNG supplies. But Beijing has spent more than a decade preparing for precisely such contingencies.
Diversified energy imports from Russia, Central Asia and Africa, extensive strategic petroleum reserves, large-scale renewable investments, and expanding regional trade networks provide buffers unavailable to most Asian economies.
The crisis reinforces China’s longstanding argument that excessive dependence on Western-dominated maritime routes and financial systems is a strategic vulnerability.
As Gulf states, Asian economies and many Global South nations seek greater economic resilience, China is positioned to benefit through expanded infrastructure investment, energy partnerships and trade integration.
Europe: The most vulnerable advanced region
Europe remains the weakest link among advanced economies. The continent has not fully recovered from the energy consequences of the Ukraine conflict.
The Iran-related shock has compounded existing vulnerabilities by raising LNG competition, industrial costs and fertilizer prices.
Germany illustrates the challenge. Its manufacturing sector faces a second major energy shock within five years. Industrial competitiveness is likely to deteriorate further, while fiscal constraints limit governments’ ability to cushion households and firms.
Southern Europe may perform somewhat better due to tourism, but energy costs will continue to restrain investment.
For Europe as a whole, stagnation represents a significant deterioration relative to earlier expectations.
Asia: The epicenter
Asia remains the region most exposed to the lingering crisis. The transmission mechanisms identified earlier — oil, LNG, trade logistics and financial spillovers — have intensified rather than disappeared.
The most vulnerable major economies are Japan, South Korea, India and many Southeast Asian importers, especially the Philippines. All depend heavily on imported hydrocarbons. Higher energy bills worsen trade balances, pressure currencies, and reduce household purchasing power.
India faces a more difficult balancing act. Strong domestic demand and favorable demographics remain strengths, yet sustained oil prices near or above $90 per barrel would raise inflation and fiscal pressures.
Across Asia, the crisis is reinforcing long-term trends toward energy diversification, regional trade arrangements and reduced dependence on vulnerable maritime chokepoints.
Philippine agonies
The Philippines is a case in point. Higher oil prices raise transportation costs, electricity prices, food inflation and fiscal pressures through subsidy and social-support demands.
Indirect effects filter through slower global trade, weaker remittance growth and reduced foreign investment amid heightened geopolitical uncertainty.
Amid historical corruption debacles, political polarization and opposition purges are a poor substitute for structural reforms that elite dynasties still shun — especially as climate, corruption and economic pressures escalate with the impending rainy season.
Neither geopolitical nor other distractions any longer suffice.
Middle East: Huge structural damage
In the Middle East, oil-exporting states benefit from higher prices but suffer from geopolitical instability and disrupted export routes.
The Gulf monarchies — particularly Saudi Arabia, the UAE and Qatar — possess financial buffers that allow them to absorb short-term volatility. Yet, infrastructure damage, shipping disruptions and investment uncertainty are imposing significant costs.
Full normalization of regional energy logistics could take years.
Iran remains the principal economic casualty. Even if hostilities diminish, sanctions, damaged infrastructure and capital flight will weigh on growth for years. Reconstruction needs will be immense.
Latin America: Mixed effects, darkening skies
Latin America faces a divided outlook. Commodity exporters such as Brazil benefit from higher agricultural and resource prices. Yet gains are partly offset by weaker global demand and tighter financial conditions.
Mexico faces indirect exposure through slower US growth and manufacturing demand.
Argentina illustrates the vulnerability of heavily indebted economies. Higher energy costs and global financing pressures complicate stabilization efforts.
More broadly, countries with large fuel-import bills will face renewed inflationary pressures.
Latin America is unlikely to experience a major crisis, but the region’s recovery trajectory will slow amid darkening skies.
Africa: The disproportionate victim
The World Bank and the IMF have repeatedly warned that poorer economies bear a disproportionate burden from higher fuel and fertilizer costs.
For many African countries, the energy shock rapidly becomes a food-security shock. Rising transport, fertilizer and import costs feed directly into consumer prices and poverty rates.
Countries such as Egypt, Kenya and Senegal face growing external financing pressures. Even resource exporters like Nigeria and Angola confront governance and investment challenges that limit the benefits of higher oil prices.
The consequences could extend well beyond 2027.
Global outlook
The emerging diplomatic opening offers the world economy a chance to avoid a far more severe downturn. Yet the broader picture remains troubling. Geopolitical shocks now translate into economic shocks with unprecedented speed.
Even if Washington and Tehran finalize an agreement, it cannot erase the deeper structural costs that this unwarranted war has already imposed on the global economy.
The era of relatively cheap, secure and politically predictable energy flows is fading.
Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute (USA), Shanghai Institutes for International Studies (China) and the EU Center (Singapore). He is also the author of “The Obliteration Doctrine” (2025) and “The Fall of Israel” (2024). For more, see https://www.differencegroup.net
This is an updated and abbreviated version of the original version that was published by China-US Focus on June 5, 2026.
