The reverberations of the West Asia conflict are reshaping the global economy at a structural level, exposing vulnerabilities in energy security, supply chains, fiscal stability, and geopolitical finance.
Dr John Sfakianakis, Chief Economist of the Gulf Research Center (photo:ANI)
The reverberations of the West Asia conflict are reshaping the global economy at a structural level, exposing vulnerabilities in energy security, supply chains, fiscal stability, and geopolitical finance. For decades, globalization assumed geography could be neutralised through finance, naval power, and insurance.
Today, chokepoints like the Strait of Hormuz and the Red Sea are reasserting themselves as key economic variables, affecting industrial inputs, consumer prices, and investment flows. The global economy now faces a new reality: shocks are no longer transient but structural and multi-layered. In an exclusive interview with Arti Bali, Dr John Sfakianakis, Chief Economist of the Gulf Research Center in Riyadh, and Fellow at Chatham House in London, explains how this conflict is accelerating a shift toward a fragmented, resilience-driven global economic order.
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Q: How is the West Asia conflict reshaping the global economy beyond oil prices and shipping disruptions? What deeper shifts are being overlooked?
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A: The deepest shift is not simply higher oil prices; it is the return of geography as a binding economic variable. For three decades, the global economy was built on the assumption that finance, insurance, and naval power could cheaply neutralize geography. That assumption is now breaking down. Roughly one-fifth of global oil supply and seaborne LNG normally moves through Hormuz, including almost half of Asia’s oil imports and about one-quarter of its LNG imports. Disruptions now extend beyond crude to fertilizers, petrochemicals, and refined fuels. The shock is migrating from “energy markets” into industrial inputs, food costs, freight, insurance, benchmark integrity, and balance-sheet risk. Western commentary remains too fixated on Brent headlines; the more consequential story is that the old model of lean inventories, just-in-time shipping, and underpriced geopolitical insurance is being repriced in real time.
Q: OPEC+ is balancing output management with geopolitical pressures. At what point do the Gulf states have to choose between economics and politics, and how long can that tightrope hold?
A: They do not face a clean binary between economics and politics; they face a hierarchy of constraints. In normal times, Gulf producers can calibrate volumes, prices, and diplomacy. In war conditions, physical logistics dominate cartel strategy. OPEC+ has limited room to raise supply, and a prolonged Hormuz disruption could remove 13-14 million barrels per day – far beyond spare capacity. Saudi Arabia has rerouted exports via Yanbu, raising flows to about 4.6 million b/d against a 5 million b/d capacity, but that is a workaround. The point at which Gulf states must “choose” is therefore the point at which physical security risks to infrastructure and shipping exceed the economic benefits of tighter markets. This balance can hold only so long as escalation remains below the threshold of sustained strikes on bypass infrastructure – Yanbu, the East-West pipeline, Fujairah, or major desalination-power complexes. Once those assets are persistently threatened, the political imperative of regime and infrastructure security overrides production economics. India’s deep energy ties and Gulf remittances make it vulnerable to prolonged West Asia conflict, while China and ASEAN are better positioned to absorb sustained energy, fiscal, and supply chain shocks due to stronger buffers and diversified linkages. India is vulnerable, but not helpless. On crude, the Indian government puts daily consumption at about 5.5 million barrels. Imports now come from around 40 countries, and about 70 per cent of crude imports are currently sourced from routes outside Hormuz, up from roughly 55 per cent earlier. The real vulnerability is not crude alone; it is LPG and household inflation. Around 60 per cent of India’s LPG consumption is imported, and roughly 90 per cent of those imports come from the Middle East. Nearly 60 per cent of LPG is imported, largely from the Middle East, prompting price hikes, higher domestic output, and alternative sourcing from the US, Russia, and Australia. On remittances, the vulnerability is meaningful but less absolute than a decade ago: RBI-linked reporting indicates India received about USD 118.7 billion in remittances in FY2023/24, with the Gulf Cooperation Council (GCC) share down to about 38 per cent, even though the UAE alone still accounts for roughly 19.2 per cent. So the Indian economy is less hostage to Gulf remittances than before, but millions of households remain exposed. On the fiscal side, the strain is already visible: The excise cuts on petrol and diesel cost roughly Rs 70 billion per fortnight gross, with a net hit of about Rs 55 billion after offsetting export taxes. So, India’s strength is diversification and administrative agility; its weakness is that a prolonged conflict quickly becomes an inflation-fiscal-remittance problem rather than just an energy problem.
Q: Why is India more vulnerable to a prolonged West Asia conflict than China and ASEAN?
A: Asia absorbs the shock unevenly. India is most exposed as energy inflation quickly feeds into prices, budgets, and households. China is more buffered in the short term due to domestic production, pipeline imports, and scale, though it still faces price shocks. Japan is highly exposed and is already using reserves and adjusting its energy policy. ASEAN is the quiet stress point due to weaker buffers and high import dependence. The first-hit sectors are aviation, chemicals, fertilizers, refining, shipping, and fuel-sensitive consumer markets. Financially, inflation expectations rise, spreads widen, and yields climb, forcing importers into reserves, subsidies, or alternative sourcing. The Western tendency is to ask whether Asia can “cope”; the sharper question is whether Asia is now being pushed into a more expensive energy transition by force rather than by design.
Q: How are Egypt, Jordan, and Lebanon faring under prolonged conflict, and is the international safety net sufficient?
A: This is a layered supply shock, not just an oil-price spike. Kharg dominates Iran’s exports, so disruption there could sharply cut output. More critically, Hormuz carries about 20 mb/d of oil – mostly to Asia. Over 90 per cent of those crude and condensate exports normally go east of Suez, where they account for about 35 per cent of refinery crude supply. Strains are already visible in shipping costs, refinery runs, and fuel markets. The real risk isn’t just volatility but simultaneous disruption to benchmarks, logistics, insurance, and infrastructure – making this less like a 1973-style embargo and more a cascading system shock. Q Does prolonged regional conflict accelerate or fundamentally threaten Saudi Arabia’s Vision 2030 diversification away from oil? A: Both, but on different time horizons. In the short term, higher oil prices provide Saudi Arabia with revenue, cash flow, and fiscal space. In the medium term, prolonged conflict threatens key sectors of Vision 2030 – tourism, logistics, project finance, aviation, industry, education, and investor confidence. Iran’s pressure strategy increasingly targets sectors central to the Gulf’s diversification push. The risk to Vision 2030 is not immediate collapse, but a scenario where Saudi Arabia gains hydrocarbon wealth while diversification becomes costlier, more securitised, and less efficient. Comprehensive safety net. The system is designed for adjustment, not chronic geopolitical stress.
Q: Central banks fought post-Covid inflation for two years. How much of that progress is now at risk from this conflict, and have the Federal Reserve (Fed) or European Central Bank (ECB) modeled West Asia downside risks?
A: Inflation progress is not reversed but is exposed to second-round risks. The ECB has explicitly modeled adverse scenarios: inflation could be almost three percentage points higher in 2027, with weaker growth through 2026-27 if the shock persists. Euro-area inflation has already risen from 1.9 per cent to 2.5 per cent recently. The Fed remains more confident, but risks remain if energy and freight costs feed into expectations. The key limitation in Western central banking is not technical modeling of shocks, but underestimating their persistence and geopolitical nature.
Q: Is the global economic order resilient enough to absorb what is unfolding in West Asia, or are we at an inflection point?
A: The system can absorb a short conflict, but not prolonged, repeated chokepoint disruptions without structural change. BIS (Bank for International Settlements) and IMF (International Monetary Fund) analyses show rising volatility, tighter financial conditions, and weaker growth from the shock. The order is not collapsing, but evolving toward redundancy, diversification, and greater state intervention. The shift is less about rupture and more about a change in the nature of globalization – from efficiency-driven to resilience-driven.
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