Iran Conflict Escalation Threatens Global Oil Flows and Economic Stability

The Iran conflict has escalated in the Red Sea, threatening global oil flows and economic stability. The Houthi militia declared a blockade on Saudi vessels passing through the Bab el-Mandeb Strait, complicating the fragile recovery of energy flows. This move forces ships to take longer routes, adding weeks to their journey and increasing costs.

The disruption in crude deliveries is particularly concerning for the global refining sector. Asian refining output plummeted during the crisis but had only recently begun recovering. China's refiners cut processing rates by 18% in June, pushing output to its lowest level since March 2020. The renewed supply disruption will likely stall any nascent recovery.

The simultaneous closure of Hormuz and Bab el-Mandeb has pushed the oil market to its limits. As fuel shortages deepen and demand contracts, the world's energy crisis risks entering a more damaging phase. World Bank chief economist Indermit Gill predicted that the conflict could cut global growth to as low as 1.3% in 2026.