The “fog of war” describes the confusion and uncertainty inherent in conflict and this principle extends to the economic consequences of war, particularly when it occurs in a region critical for global energy supplies – a chokepoint for one-fifth of the world’s oil and a third of its natural gas.
On March 6, 2026, Qatar issued a warning about the potential global economic impact of the joint U.S.-Israeli strikes on Iran, stating, “This will bring down the economies of the world.”
The U.S. Economy was already showing signs of weakness prior to the strikes, with data released on March 6 revealing an unexpected loss of 92,000 jobs in February.
Uncertainty and Risks
Significant uncertainty remains regarding the length of the war in Iran, the countries that will develop into involved, and the overall costs. These factors will ultimately determine the extent of the economic damage in the U.S. And globally.
Disruptions to the supply of oil and liquefied natural gas are expected, particularly as shipping through the Strait of Hormuz has virtually halted. The military action also carries substantial fiscal costs.
Since February 28, the price of crude oil has jumped by about 25%, driving up gasoline prices across the U.S. The United States has already experienced the loss of aircraft and a depletion of its missile stock, and early estimates put the cost of the war at nearly US$1 billion per day.
Challenges Managing a Supply Shock
The 1979 Iranian Revolution also caused a spike in oil prices, contributing to a period of “stagflation” – stagnant growth combined with high inflation – in the United States and Europe.
While a similar scenario is not anticipated now, as economies are less reliant on oil and natural gas than in the 1970s, supply shocks remain difficult to address. Policymakers will likely face hard trade-offs in responding to the current situation.
Trade-off Between Fighting Inflation or Recession
Responding to supply shocks requires central banks to decide whether to raise interest rates to combat inflation or lower them to support economic growth and employment. Raising rates curbs inflation but slows growth, while lowering rates has the opposite effect.
In both the late 1970s and during the COVID-19 pandemic, the Federal Reserve chose to keep rates low to support the economy, which led to increased inflation.
However, the Federal Reserve’s credibility is currently at risk due to attacks from President Donald Trump on Chairman Jerome Powell, the prosecution of Federal Reserve Board member Lisa Cook, and the potential appointment of a new chair who may favor lower rates.
Concerns about these actions could contribute to higher inflation, creating a self-fulfilling prophecy. Other negative economic signals, including tariff policies, cuts to government employment, rising federal debt, and financial vulnerabilities, are also weighing on the U.S. Economy, and a spike in oil prices could further weaken it.
Frequently Asked Questions
What is the “fog of war”?
The “fog of war” refers to the confusion and uncertainty on the battlefield and the possibility of fatal error, a concept that also applies to the economic consequences of war.
What warning did Qatar issue regarding the war?
On March 6, 2026, Qatar warned that the war “will bring down the economies of the world.”
What has happened to the price of oil since the strikes began?
The price of crude oil has jumped by about 25% since the U.S. And Israel began bombing Iran on February 28.
As the economic fallout from the conflict in Iran unfolds, how might global policymakers balance the need to control inflation with the risk of triggering a recession?
Keep reading
