On Monday afternoon, President Donald Trump issued a public warning, threatening, yet again, to dismantle Iran’s remaining energy and water infrastructure if a negotiated settlement is not reached.
Declaring that the United States is in discussions with a “new, and more reasonable, regime,” Trump warned that if Iran kept threatening regional economic interests, American forces would “blow up and completely obliterate all [Iranian] Electric Generating Plants, Oil Wells and Kharg Island,” referring to the critical port and oil depot.
This threat comes on the tail end of a long series of back-and-forth threats between Trump and Iranian officials, with each side threatening the other’s economic and energy interests. This rhetorical tit-for-tat underscores a defining characteristic of the Iran war. Rather than turning on the conquest of territory, the destruction of leadership or the elimination of warfighting capacity, this war increasingly spins on the orbit of economic and energy pressure.
“Whether you like it or not, this is an energy war,” Israeli security analyst Gilad Cohen observed in a recent post.
Iran’s economy
Despite the persistent headlines, the clear economic loser of this conflict is Iran. Even without the threatened additional damage to Iranian infrastructure, the Iranian economy has already sustained severe damage. Since the start of the war, Israeli and U.S. forces have systematically dismantled key elements of Iran’s energy and defense sectors. Airstrikes have targeted major petroleum hubs around the capital, including the Shahran oil refinery, as well as the South Pars natural gas field, and critical energy facilities in Karaj. Electrical grids in multiple major cities, including Tehran, have been disrupted, leading to rolling blackouts throughout the country.
The strikes have also targeted major industrial and cultural assets. Israeli forces hit two major steel plants, and Iranian state television released visuals showing massive destruction at the capital’s Azadi Stadium, the largest sports complex in Iran.
Outside of Iran, the economic foundation supporting its regional proxies is also being systematically erased. In Lebanon, the Israeli military has carried out coordinated strikes against Al-Qard Al-Hasan, a Hezbollah-affiliated financial institution, destroying approximately 30 branches by early March. Alongside these strikes, the IDF has actively targeted Hezbollah gas stations and other businesses, choking off the financial lifelines of the proxy network.
Maj. (res.) Alexander Grinberg, an expert on Iran at the Jerusalem Institute for Strategy and Security (JISS), explained that the Iranian regime views the economic damage it is sustaining as an existential threat.
“The economic damage is incredibly painful to the regime. You can continue the fight if you don’t have [Ali] Khamenei, but you can’t continue to fight if you can’t pay your officers. If you can’t financially sustain the war, that’s a fatal problem,” he told JNS. Grinberg added that the mounting economic pressure is explicitly linked to potential regime change in Iran. “The protests in Iran before the war started mostly because of the bad economic situation. Economic pressure will likely damage the domestic stability of the regime even further,” he said.
The Gulf’s economy
As Tehran scrambles to retaliate, its aggression has spilled outward, pulling neighboring Gulf states directly into the conflict. While Iran has certainly borne the brunt of the economic fallout, the toll on Gulf infrastructure is also significant. In Saudi Arabia, a drone strike on March 2 forced the emergency shutdown of Saudi Aramco’s Ras Tanura refinery, a critical export terminal with a capacity of 550,000 barrels per day. The United Arab Emirates sustained an unprecedented volume of direct hits. Operations at the UAE’s Shah gas field were suspended following a drone strike, and Fujairah Port sustained repeated attacks that damaged crude storage tanks and halted oil loadings. Across the Gulf, a refinery operated by Bapco Energies in Bahrain was targeted, and Qatar’s Ras Laffan Industrial City sustained strikes that knocked out 17% of the facility’s Liquefied Natural Gas (LNG) production capacity, causing structural damage that will take three to five years to fully repair.
This physical destruction is driving a systemic economic crisis across the Gulf Cooperation Council. The blockade of the Strait of Hormuz and the active targeting of regional infrastructure have forced Gulf producers to collectively cut oil production by at least 10 million barrels per day. The UAE alone has suffered a 25% drop in oil production and a one-third decline in its total exports. Several Gulf energy companies have declared that they will be unable to meet their contractual export quotas for this quarter. In total, Gulf states lost an estimated $15 billion in energy revenues in the first month of the war alone.
However, the devastation extends far beyond energy hubs. The persistent Iranian strikes on civilian targets have undermined the Gulf’s reputation as a secure destination for tourism and business. Since the beginning of the war, Iranian projectiles have struck multiple iconic sites across the Gulf, including the Burj Al-Arab hotel, the Crowne Plaza Hotel in Manama, and the Palm Jumeirah. Iran has also struck almost every major airport across the GCC.
Israel’s economy
While the Gulf manages targeted infrastructural strikes, Israel is absorbing the immense strain of sustaining a hot war. During the first 20 days of the 2026 Iran campaign, the Israeli military consumed approximately $6.4 billion on munitions, logistics and widespread reserve mobilization. A critical component of this expenditure is the rapid depletion of interceptor missiles such as the Arrow 3 and David’s Sling, which prompted the government to authorize an immediate emergency allocation of $825 million for urgent security supplies. Consequently, national military expenditure has permanently expanded, projected to consume between 5% and 6% of the national GDP in 2026.
The physical and social toll on the domestic economy is also significant. By March 24, the Israel Tax Authority recorded 17,683 property damage claims resulting from missile and drone impacts. The agricultural sector has also hemorrhaged capital with losses in northern territories exceeding $3 million in just one week, driven primarily by damage to thousands of olive trees.
Despite the severe strain, the conflict is likely to have a positive impact on Israel’s defense-tech sector, presenting an economic silver lining. The high-intensity, multi-front war has served as a real-time proving ground for Israeli military hardware, specifically its advanced missile defense systems and cybersecurity infrastructure. This cemented “combat-proven” status has catalyzed a massive surge in global demand, transforming the defense sector into a primary economic growth engine capable of offsetting other domestic losses. The stellar performance of Israeli technology in the current conflict, as well as the growing scene of global instability, is likely to leave Israel’s most important sector in an ideal position to grow and prosper on the other side of this conflict.
Dan Ben-David, professor of economics, Department of Public Policy, Tel Aviv University, told JNS that “The war has shown just how technologically advanced [Israel’s high- tech sector] actually is,” adding that it is “great for our hi-tech and defense industries.” Ben-David further observed that the tech boom has resulted in “foreign currency flowing into Israel, and the shekel has become stronger and stronger.”
Benjamin Bental, Economics Policy Program chair at the Taub Center for Social Policy Studies in Israel, also noted the remarkable performance of the tech sector.
“The economy in Israel’s hi-tech sector is very impressive, and they’re really carrying this country through this crisis with flying colors. The damage could be much, much bigger, and indeed, there is increasing demand for industrial and defense output in particular,” he told JNS. However, Bental warned that “one shouldn’t exaggerate,” noting that “this war is not going to be self-financing. The damages are huge, and the direct costs are extensive.”
Ben-David further warned that the resultant imbalance toward the tech sector carries inherent risk. “One very strong sector is exporting a disproportional amount and is attracting disproportional amounts of investments. This has a huge negative effect on the remaining exporters who produce in shekels but sell abroad in dollars and euros, and receive much less abroad for their goods and services,” he explained.
Ben-David added that Israel still has a very robust economy and is likely to overcome the economic pressure of this campaign. “The bottom line is that Israel has one of the most resilient economies in the world,” he said.
The global economy
The localized economic damage within the Middle East has expanded into a systemic crisis for the global economy. The central cause for this upheaval is Iran’s decision to effectively blockade the Strait of Hormuz, one of the globe’s most important waterways.
In the first two weeks of the conflict, Iran attacked over 20 commercial vessels in and around the strait and allegedly laid several naval mines in the crossing. In the same period, marine cargo war risk premiums for vessels attempting to transit the strait surged by 200% to 300%. This astronomical pricing, combined with the physical threat of strikes, paralyzed commercial logistics. Commercial shipping traffic through the Strait contracted by 90%-95%.
The immediate result of the blockade has been unprecedented energy market panic. The International Energy Agency has classified the situation as the largest supply disruption in the history of the global oil market. Global oil supply plummeted by 8 million barrels per day. Markets have reacted violently, with Brent crude oil prices surging as high as $116 per barrel.
Europe, still recovering from its recent shift away from Russian energy, has been forced into a resurgent energy crisis. The loss of Middle Eastern LNG supplies caused European gas prices to nearly double, with benchmark indexes surging over 90%. This supply shock cost the European Union an additional €2.5 billion (about $2.9 billion) for energy imports just in the first 10-days of the war.
In the United States, the crisis prompted aggressive shifts in domestic energy policy to insulate the national economy from price spikes at the pump. The Trump administration authorized the immediate tapping of the Strategic Petroleum Reserve to flood the market with emergency liquidity. Concurrently, the Department of Energy activated contracts to actively replenish the Strategic Petroleum Reserve, purchasing 1 million barrels of crude oil. The administration also accelerated deregulation of the domestic energy sector to expand American export capacity and actively suppress domestic gasoline prices.
Bental said that despite the economic instability, he did not think we “are facing a major crisis.” He noted that “the versatility of energy sources has increased dramatically” in recent years, adding that “prices are going to be higher, but I don’t think that at the higher prices, there’s going to be a significant shortage in any long-term sense.”
Economic escalation
The threshold for further escalation is low, and the destruction of infrastructure across the Middle East is likely to continue. With President Trump’s threat still active, all of Iran’s energy sites are on the chopping block. If a future strike breaches them, it would completely collapse Tehran’s economy and trigger a significant reprisal designed to inflict economic damage across the Gulf.
“We have to believe them and take into consideration that if Trump stands by his ultimatum, we will see the Iranians attacking civilian infrastructure all over the region,” Raz Zimmt, director of the Iran and the Shi’ite Axis research program at the Institute for National Security Studies (INSS) at Tel Aviv University, told JNS. “The Iranians realize that their only leverage is threatening the energy sector,” he added.
Simultaneously, the threat of a total maritime blockade at the Bab el-Mandeb strait, which connects the Red Sea to the Gulf of Aden and the Indian Ocean, remains high. The Iranian leadership has warned that any allied ground invasion or direct attack on sovereign Iranian territory, such as Kharg Island, will rapidly expand the war to the Red Sea.
“If the enemy wants to take action on land in the Iranian islands or anywhere else in our lands or to inflict costs on Iran with naval movements in the Persian Gulf and the Sea of Oman, we will open other fronts,” Ebrahim Zolfaghari, a spokesman for the Iranian regime, said in a recent briefing. A full closure of this second waterway by Iran-backed Houthi forces would force the remaining global shipping traffic to reroute around Africa, and massively expand the economic fallout of the Iran war.
