What many policymakers had long feared — but hoped to avoid — has now materialized. On February 27, 2026, an open confrontation between Israel -backed by the United States - and Iran erupted into direct military exchanges. Within hours of Israeli strikes on strategic targets inside Iran, retaliatory attacks hit Israel and US military facilities in Qatar, Bahrain, Kuwait, and the United Arab Emirates. Financial markets reacted instantly. Oil prices jumped. Safe-haven assets rallied. The message was unmistakable: geopolitical risk has returned as a central driver of the global economic outlook.

The world economy entered 2026 with weakening growth momentum and fragile disinflation trends. This new conflict introduces a layer of uncertainty that could prove both deeper and longer-lasting. At least three transmission channels are already visible: energy, financial markets, and global trade logistics. The scale of the fallout will ultimately depend on the duration and geographic scope of the conflict. Yet experience — from the 2022 energy shock to the Red Sea shipping disruptions of 2024–2025 — suggests that instability in the Middle East rarely remains contained. It almost always reverberates through the global economy.

Pressure Point One: Energy as the World’s Vulnerability
The Middle East remains central to global energy supply. Roughly 20 percent of the world’s oil trade — nearly 20 million barrels per day—passes through the Strait of Hormuz, one of the most strategic chokepoints in the global energy system. Even a limited disruption to Iranian production adds a risk premium to crude prices. A broader escalation affecting shipping lanes or maritime insurance in the Strait would be far more consequential.

Past episodes suggest that every $10 increase in oil prices can add roughly 0.2–0.3 percentage points to global inflation within six to twelve months. If crude prices were to be above $110–120 per barrel for a sustained period, the implications for household purchasing power and industrial costs would be significant. Central banks that were contemplating rate cuts in 2026 may be forced to delay. The prospect of “higher for longer” interest rates could re-emerge, slowing the normalization process after an extended tightening cycle.

For Asia, the exposure is immediate. East Asia sources around 60–65 percent of its oil imports from the Middle East. Japan, South Korea and India are particularly sensitive to price spikes. Imported inflation would be difficult to avoid in a prolonged conflict. Indonesia and Malaysia could experience short-term commodity windfalls, but these gains may be offset by fiscal pressures if governments seek to cushion domestic fuel prices through subsidies.

Pressure Point Two: Financial Markets and Risk-Off Dynamics
Energy is only one channel. Financial markets serve as the fastest transmission mechanism of geopolitical risk. Major Middle East conflicts historically trigger US dollar strength, declining US Treasury yields amid flight-to-safety flows, and rising gold prices.

Should the conflict evolve into a wider proxy confrontation—or draw in major external powers—global markets could shift into a deeper risk-off mode. Emerging economies may face capital outflows, currency depreciation and rising risk premiums. Countries with large current account deficits or heavy external financing needs would be particularly vulnerable.

The involvement of US military assets across the Gulf elevates the strategic dimension of the crisis. Markets are not pricing energy risk alone; they are pricing systemic geopolitical uncertainty. That distinction matters. The latter tends to linger longer and affect cross-border investment decisions well beyond the immediate conflict zone.

Pressure Point Three: Trade and Logistics
The conflict also has direct implications for shipping routes in the Persian Gulf and the Red Sea. During the maritime security disruptions of 2024–2025, war-risk insurance premiums surged to two to three times normal levels. A similar spike would increase freight costs, encourage rerouting of vessels and extend delivery times, pushing global logistics expenses higher.

In a world still heavily dependent on cross-continental supply chains, these additional costs ultimately feed into consumer prices. The global disinflation trend that began to take shape in 2025 could stall — or even reverse — if disruptions persist. The result could be an uncomfortable combination of slower growth and renewed price pressures.

Three Possible Scenarios
Analysts broadly outline three potential trajectories. First, a contained conflict. Retaliatory strikes occur but do not escalate into sustained disruption of the Strait of Hormuz or direct confrontation between major powers. Oil prices spike temporarily before stabilizing. The macroeconomic impact, while noticeable, remains manageable.

Second, a widening regional conflict. Proxy actors such as Hezbollah in Lebanon, Houthi forces in Yemen, and various militias in Iraq and Syria expand the theater of operations. Attacks on energy infrastructure or transit routes raise supply risks. In this scenario, oil prices could exceed $120 per barrel, pushing global inflation higher and forcing central banks to delay monetary easing.

And third, a major-power confrontation. If geopolitical dynamics draw in countries such as China or Russia more directly, the crisis would shift from a regional war to a systemic global shock. Prolonged energy disruption, recession risks in Europe and parts of Asia, and a renewed stagflationary environment would become plausible outcomes. Duration and escalation dynamics will determine which scenario becomes reality.

Implications for Asia and ASEAN
Asia occupies a paradoxical position: highly vulnerable yet systemically indispensable. The region accounts for more than half of global growth, but remains deeply dependent on stable energy flows and open trade routes. India imports over 80 percent of its crude oil needs, leaving its current account and currency exposed to price volatility. Japan and South Korea face rising production costs across manufacturing and petrochemicals.

The Association of Southeast Asian Nations (ASEAN) presents a more diversified structure. Some commodity exporters may benefit from higher prices in the short term. However, as one of the world’s most trade-dependent regions, ASEAN faces a triple shock: rising energy costs, capital flow volatility and weaker external demand. For Indonesia — the largest economy in ASEAN — the stakes are particularly high. As both a commodity exporter and a major fuel importer, Indonesia sits at the intersection of opportunity and vulnerability. Higher coal and LNG prices may support export revenues, yet sustained oil price increases would strain the fiscal balance if fuel subsidies expand and could pressure the rupiah amid global risk-off sentiment.

In the near term, macroeconomic stability — especially inflation management and exchange rate resilience — will be critical across the region. Over the medium term, the crisis reinforces the urgency of diversifying energy sources, strengthening strategic reserves, accelerating renewable transitions and deepening intra-regional integration to reduce overexposure to vulnerable supply routes.

Conclusion
Markets tend to react swiftly — sometimes excessively — in the early days of conflict. What ultimately matters is whether this escalation proves episodic or structural. The global economy had only just begun to emerge from a prolonged phase of high inflation and monetary tightening. A sustained Middle East crisis risks delaying that recovery.

For Asia and ASEAN, the challenge goes beyond absorbing short-term volatility. It is about reinforcing economic resilience in an increasingly fragmented and geopolitically uncertain world. The present escalation is a reminder that geopolitical stability remains a fundamental prerequisite for sustainable global growth.
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Iman Pambagyo is the Trade Ministry’s Director General of International Trade Negotiations (2012-2014, 2016-2020) and Indonesia’s Ambassador to the WTO (2014-2015).

The views expressed in this article are those of the author.