Each day, Persian Gulf countries produce nearly three of every ten barrels of crude oil worldwide, so it is a serious matter indeed when production and exports from the region are disrupted to the degree we have seen in recent weeks. Although large producers such as Saudi Arabia and the United Arab Emirates (UAE) have access to other shipping routes for some of their exports, they rely on the Strait of Hormuz to transport the bulk of their output to international buyers.
Persian Gulf conflict: Inflation risk mounting at home and abroad
Rising commodity prices and shipping costs due to the conflict in the Persian Gulf could reverse the decline in imported inflation in Iceland. The risk of even more persistent inflation stronger second-round effects in Iceland escalates with every week of continued hostilities
As is well known by now, the conflict in the Gulf has had a profound impact on crude oil prices. A barrel of Brent crude, the benchmark for pricing in the European market, now costs USD 108 and is up 90% year-to-date. Benchmark prices for petrol, diesel fuel, and jet fuel have mushroomed likewise. Based on common benchmarks in Europe, petrol prices are up 67%, diesel 118%, and jet fuel 163% since the start of 2026. As the chart indicates, the price of many of these products is now close to the peak from the first few months of the Ukraine war and has kept climbing well into this week.
In addition, roughly a fifth of the world’s natural gas is processed in the region, and it, too, has soared in price in the Asian and European markets. Natural gas prices have been better-behaved West of the Atlantic, however, as the US has resources enough to meet its own needs, and natural gas markets are far more localised than the markets for crude oil products.
But the conflict has begun to affect far more than fuel prices alone. There are growing concerns about manufacturing costs and potential output in various industries that rely on inputs from the Middle East. According to a summary from The Economist, 22% of the world’s traded urea, an important raw material for fertiliser production and industrial manufacturing, comes from the region, as do 24% of aluminium, a third of helium, and 45% of sulphur.
Plastics manufacturing also depends heavily on inputs from the Middle East, including naphtha (45% of the global supply). The list does not stop there, either: a fourth of the world’s industrial diamonds and 20% of its methanol come from the Persian Gulf area.
As could be expected, prices for many of these goods have ballooned recently, although they have drawn less attention than fuel prices. Similarly, many plastics manufacturers in Asia have declared force majeure – i.e., external circumstances beyond their control – and suspended fulfilment of their contracts.
It is safe to say that most observers would not think first of helium as a vital commodity that would be trampled underfoot in the current situation, but the Persian Gulf produces roughly a third of global supply. Among other things, helium is used to cool the supermagnets used to make microprocessors and semiconductors. The Ras Laffan megafactory, one of the world’s largest liquid natural gas manufacturers, also produces a large share of the helium used in industries worldwide. The plant’s operations have been hobbled by attacks from Iran, and concerns about imminent shortages have escalated in the recent term.
The global helium market is not characterised by the effective price formation seen in other commodity markets, but because there is no readily available substitute for gaseous helium, a protracted shortage could severely disrupt computer equipment manufacturing.
Although these commodities comprise a minute share in direct imports to Iceland, they are essential to many of the goods that are imported here. These concerns are compounded by the higher cost of transporting goods to Iceland by sea or air. Each week that passes without the restoration of commodity supplies from the Persian Gulf makes it more likely that global supply chains will be derailed and the attendant price shock that much more persistent and widespread.
In can be said that the impact of the war in the Persian Gulf is currently transmitted through three main channels:
- Oil and oil products
- Natural gas
- Industrial commodities
In the recent past, imported goods have mitigated overall inflationary pressures, as the ISK has been fairly stable and inflation abroad has generally been on the decline. That could change quite soon, however, if the hostilities in the Persian Gulf region drag on. The Central Bank of Iceland (CBI), like its counterparts in other countries, is deeply concerned about the situation, as it made abundantly clear at the time of the 18 March interest rate decision.
But unlike most other central banks, the CBI is faced with the additional challenge of bringing long-term inflation expectations to heel. In such a situation, there is a greater risk that external price shocks like the one currently looming over the Icelandic economy will be more protracted, as the second-round effects on inflation will be that much stronger. To add insult to injury, it is growing ever more likely that the review clause in wage agreements will be activated this autumn, but in that case, the source of the inflation that triggers the review will make no difference.
