How gulf conflicts trigger global shocks

Solly Rakgomo | Monday July 7, 2025 06:00

During the June 2025 conflict involving Israel, Iran and the United States, this dependency was exposed through the abrupt and significant increase in crude oil futures.

Financial markets rapidly priced in heightened risk, illustrating how deeply geopolitical volatility in this region is embedded in the valuation logic of global commodity markets. Specifically, oil prices surged by up to 15% during the peak of hostilities, not because supply had already been curtailed, but due to the perceived plausibility of future disruption.

This distinction is crucial. The market’s anticipatory behaviour reflected structural vulnerabilities: the region’s dependence on a single maritime export route (the Strait of Hormuz) and the exposure of critical Saudi oil facilities to potential missile strikes.

These features transform political tension into financial volatility, with oil futures acting as instruments of geopolitical risk pricing. In this system, investor behaviour hinges less on immediate empirical data and more on forward-looking scenarios.

It is the credible possibility of a sustained disruption (not its realisation) that reprices the global oil benchmark. Geopolitical signalling, rather than physical warfare, becomes the dominant mechanism of economic transmission. This positions oil markets as both barometers and amplifiers of regional instability.

The Strait of Hormuz

Remains the System’s Weakest Link

The Strait of Hormuz is a narrow waterway (just 21 miles across at its narrowest point) that functions as the sole maritime passage for approximately one-fifth of the world’s daily crude oil supply. It is bordered by Iran to the north and the United Arab Emirates and Oman to the south, placing it at the heart of the region’s energy logistics network. The overwhelming reliance on this single corridor introduces an inherent structural fragility into the global oil supply chain. This chokepoint is vulnerable not because it is under constant attack, but because it is indispensable. Almost all Gulf exporters (Saudi Arabia, Iraq, Kuwait, the UAE, and Iran itself) must rely on this strait for their oil exports. While overland pipelines such as the East-West pipeline in Saudi Arabia offer limited redundancy, they cannot match the volume or flexibility of tanker routes. This means any interference, ranging from military operations to mere threats or acts of sabotage, can have immediate and magnified effects on oil prices and global shipping costs. Iran’s asymmetric capabilities, including mines, missile batteries, and swarming fast-attack craft, are specifically designed to exploit this vulnerability. These are not tools of conventional warfare meant to achieve military victory; they are instruments of leverage, crafted to inject uncertainty into global markets. A single mine or missile launch need not destroy a tanker to trigger market panic; the potential for disruption alone suffices. Thus, Hormuz is not merely a geographic passage but a fulcrum of global risk: small changes in regional stability translate into large fluctuations in global energy pricing.

Strategic Restraint Signals

De-escalation to Energy MarketsThe pattern of military action during the June 2025 conflict illustrates a carefully controlled escalation strategy. Iran’s retaliation for U.S. strikes on its nuclear facilities was notably restrained: a limited, clearly signalled missile attack on a U.S. base in Qatar that caused minimal damage. This choice was strategic, designed to communicate capability while avoiding a broader war that could cripple Iran’s economy or invite direct confrontation with U.S. forces. Strategic restraint here is a matter of utility. Iran faces a complex matrix of constraints: it must preserve deterrence, avoid alienating key trade partners such as China and India, and maintain access to its own vital oil export revenues. Closing Hormuz or launching direct strikes on Gulf oil infrastructure would invite overwhelming military retaliation and diplomatic isolation, outcomes fundamentally at odds with Tehran’s long-term interests. Thus, Iran engages in calibrated brinkmanship: projecting a threat credible enough to deter aggression, yet not provocative enough to trigger systemic retaliation.

Iran’s Constraints Prevent

Sustained Oil DisruptionsWhile Iran’s ability to disrupt oil flows is real, it is structurally bounded by overwhelming material constraints. Iran’s asymmetric capabilities, such as naval mines, missile salvos, and swarm attacks, are effective in producing short-term disturbances. However, these tools lack the operational depth to sustain a long-term closure of vital shipping lanes. Moreover, Iran’s economy is precariously reliant on oil revenues, which are already limited by international sanctions. Any action that leads to a sustained drop in oil exports would accelerate economic deterioration at home. Internally, the regime faces growing pressure from inflation, currency devaluation, and unemployment, pressures that a prolonged energy crisis would intensify. Diplomatically, Tehran must also weigh the response from its remaining international partners. Disrupting global oil supply would antagonise China and India, both crucial energy customers, and potentially trigger multilateral reprisals or sanctions extensions. This creates a geopolitical box: Iran can disrupt, but only within carefully measured bounds that preserve its own economic and political viability. Thus, systemic interdependence operates here as a restraint mechanism. Iran’s disruptive capabilities exist, but the cost of using them at scale would be internally destabilising and externally isolating.

Gulf Spare Capacity Is

the World’s Only Safety Valve

The capacity to rapidly increase oil production during times of supply disruption is known as spare capacity. Globally, this capability is heavily concentrated in two countries: Saudi Arabia and the United Arab Emirates. Together, they control over four million barrels per day of idle production, about two-thirds of global spare capacity. This makes them the de facto “central banks” of the oil market: they cannot prevent shocks, but they can respond to them quickly enough to limit contagion. The strategic function of spare capacity is not theoretical; it is applied during crises.