Working paperThe 2026 US/Israel–Iran war

One more round: the economic costs of a continued US/Israel–Iran war

On 28 February 2026 the United States and Israel launched a war against Iran. Iran struck back at economic targets in the Gulf states that host US bases, and shipping through the Strait of Hormuz became restricted and far more expensive. The fighting has largely paused since September, but talks have stalled. The United States has threatened a new round of strikes, and there is widespread speculation that the war will resume after the US midterm elections on 3 November; Gulf governments are reported to have been told to prepare for a short, intense campaign (CBS News, 2026; MS NOW, 2026). We estimate what the war has cost so far, and what six more months of fighting in 2027 would add.

Matra · 2 November 2026

Explore the scenario dashboardRead the technical paper (PDF)

Two models, and how to read the numbers. The results come from two models, and each line below says which one.

CGE model

A dynamic model of the world economy, GTAP-RD (Aguiar, Corong and van der Mensbrugghe, 2019), built on the standard GTAP model (Corong et al., 2017). It tracks GDP, trade and industries country by country from 2025 to 2030, on our Open CGE Database (Matra, 2026a), with a no-war path from the SSP2 projections (IIASA, 2023). Every result, in % or in dollars, is the gap from a world with no war in the same year. A figure of −5% in 2027 means GDP in 2027 is 5% lower than it would have been without the war, not that the economy shrank by 5%.

Price model

A short-run model of the world oil and gas market, calibrated to measured 2026 prices (EIA, 2026), counting both lower demand and oil stock changes as the market's response (Kilian and Murphy, 2014), with a low-end oil price response from Caldara, Cavallo and Iacoviello (2019). Energy costs pass through to consumer prices at rates estimated from past oil shocks (Jordà, 2005; Känzig, 2021). Oil is shown as the price itself, in dollars a barrel, next to its no-war level. Gas and consumer prices are shown as the gap from their no-war level in that year: a gap in the price level, not an annual inflation rate.

What is a CGE model?

A computable general equilibrium (CGE) model is a map of the whole world economy in numbers. It covers every industry, household and government in each region, and the trade between them, all linked through prices.

Because everything is linked, a shock in one place ripples through the rest of the economy. When Gulf oil supply falls, oil gets dearer; refiners, airlines and power plants pay more; households have less to spend on other things; other countries produce more oil; and trade shifts around the world. The model follows all of these knock-on effects at once.

It is built on standard economic theory: firms keep their costs down, households make the most of their income, and prices move until what is supplied matches what is bought. It is matched to real data on how each economy produces, spends and trades. Our dynamic version also tracks how investment builds up each economy's capital year by year, so a shock today can still be felt years later.

A CGE model answers "what if" questions: it compares a world with the war to the same world without it. It is not a forecast of what GDP will be.

Like any model, it is a stylised picture of the economy and does not capture every link. For example, it leaves out money and the financial sector, so effects through banks, financial markets, interest rates and business and consumer confidence are not included. The results give useful insight into the size and direction of the war’s effects and who is hit hardest, but they should not be read as precise forecasts.

Headline results

Five things to know

  1. $140Modelled Brent crude, $ a barrel, 2027, if fighting goes on into 2027

    Oil would cost far more in a second round. Our price model puts Brent crude at an average of about $140 a barrel in 2027 if fighting goes on into 2027. The EIA forecasts $84 if the war ends in 2026, against $53 had there been no war. More Gulf supply would be lost than in 2026, and $140 holds if the market can again absorb a shortfall as it did in 2026, largely through oil stocks. If they run short, Brent could pass $150.Price model

  2. −14.8%Modelled real GDP, Gulf economies excl. Iran, against the no-war baseline, 2027, if the war goes on

    The Gulf economies take the biggest hit. In our CGE modelling, real GDP of the Gulf economies, excluding Iran, would be 14.8% below the no-war baseline in 2027 if the war goes on, against −2.8% if it ends in 2026. In 2026 the gap is already −11.1%. These figures come from our model scenarios, not from official GDP data.CGE model

  3. 2.5×Long-term lasting cost of a longer war: modelled Gulf GDP gap in 2030 if the war goes on into 2027 and then ends, times the gap if it ends in 2026

    A longer war leaves a lasting mark. In our CGE modelling, in 2030, three years after the fighting would end, Gulf GDP is still 1.60% below the no-war baseline if the war goes on into 2027 and then ends, against 0.63% if it ends in 2026: a gap 2.5 times as large. Lost investment and slower repair of damaged plants keep output down for years.CGE model

  4. −0.42%Modelled real GDP, India, against the no-war baseline, 2027, if the war goes on

    Outside the Gulf, Asia is hit hardest. In our CGE modelling, India's real GDP would be 0.42% below the no-war baseline in 2027 if the war goes on, against 0.15% if it ends in 2026. Japan and Korea: −0.23% against −0.11%. China: −0.14% against −0.04%. These economies buy much of their energy from the Gulf.CGE model

  5. +2.6–3.9%Modelled US consumer prices against their no-war level, 2027, if fighting goes on into 2027

    Households pay through prices. Our price model puts US consumer prices 2.6% to 3.9% above their no-war level in 2027 if fighting goes on into 2027, against 0.9% to 2.0% if the war ends. Euro area: 2.3% to 2.8%, against 1.0% to 1.3%. This is a gap in the price level, not an annual inflation rate.Price model

Gulf economies

A second round would slow the Gulf's recovery and leave deeper, longer-lasting damage

In 2026 the war cut Gulf output of crude oil, refined fuel and aluminium, and exports of liquefied natural gas (LNG) and fertiliser; these losses are measured from real-world data. In our CGE modelling of those losses, Qatar's GDP in 2026 is −30.2% against the no-war baseline, that of Iraq, Kuwait and Bahrain −19.3%, Saudi Arabia's −6.7%, the UAE's −4.8% and Iran's −3.8%, and world GDP −0.32%. These are modelled estimates, not official GDP figures. In the model, exporters that keep shipping get some cushion from higher oil prices. Qatar gets none, because it loses both the volume and the price of its gas.CGE model

Gulf economies, excluding Iran: modelled real GDP against the no-war baseline CGE model
War ends in 2026War goes on into 2027, then ends
0 −4% −8% −12% −16% 0 = no-war baseline 2025 2026 2027 2028 2029 2030 −14.8% in 2027 −2.8% −11.1% in 2026 −0.63% if war ends in 2026 −1.60% if war goes oninto 2027, then ends

% gap from the no-war baseline in each year; zero is a world where the war never happened. Saudi Arabia, the UAE, Qatar, Iraq, Kuwait and Bahrain, weighted by baseline GDP. Source: our calculations, dynamic CGE model (GTAP-RD), central case. Provisional.

Energy and consumer prices

A second round of fighting would push energy costs much higher again

Brent averaged $69 a barrel in 2025 and about $96 in 2026 (EIA, 2026); these are actual prices. Averaged over 2026 as a whole, world oil supply fell about 6.7 million barrels a day short of the EIA's pre-war projection (February 2026). Lower consumption absorbed about a third of that, and oil stocks about two-thirds; most of the stock part was stock building that the EIA had projected before the war and that did not happen, and only about 1.3 million barrels a day was an actual drawdown of physical oil stocks. This covers all oil stocks worldwide, commercial and government together, not only emergency reserves; part of it is the EIA's estimate for stocks it cannot measure directly (EIA, 2026). In our scenario where fighting continues into 2027, lost Gulf supply averages about 10.7 million barrels a day over 2027, against about 6.7 million over 2026 in our scenarios. The 2027 loss is bigger because the 2026 average includes January and February before the war and the partial recovery from the autumn, while our longer-war scenario, built from measured 2026 data, has six months of fighting as intense as the worst month of 2026 (not more intense), a three-month shutdown of the Saudi and UAE pipelines that bypass the strait, and, once the fighting stops, more lasting damage to oil and gas plants than 2026 left behind, because already damaged plants are hit again (see Two war paths). On that basis our price model puts Brent at about $140 if the market can again absorb a shortfall as it did in 2026, and more if it cannot. Even if the war ends in 2026, the EIA forecasts Brent at $84 in 2027, against a hypothetical $53 had there been no war (EIA, 2026).Price model

Brent crude oil, $ a barrel, annual average Actual 2025–2026 · Price model 2027
$40 $60 $80 $100 $120 $140 $160 2025 2026 2027 war begins $140 if fighting continues low end $125–130 could pass $150 $84 war ends $53 hypothetical:if no war had occurred $69 $96 in 2026$58
Fighting continues into 2027about $140

if the market absorbs a shortfall as it did in 2026, largely through stocks; low end about $125 to $130; could pass $150 if stocks run short

2027
War ends in 2026$84

EIA forecast; a hypothetical $53 if no war had occurred

2027
Actual$96

against $69 in 2025, and a hypothetical $58 if no war had occurred in 2026

2026

2025 and 2026 from the EIA Short-Term Energy Outlook (EIA, 2026). 2027 from our short-run price model: the extra lost Gulf supply priced with the market response measured in 2026, including lower stocks (central), or the oil price response of Caldara, Cavallo and Iacoviello (2019) (low end). Provisional.

Higher energy costs feed through to the shops. In our price model, US consumer prices are 2.6% to 3.9% above their no-war level in 2027 if fighting goes on into 2027, against 0.9% to 2.0% if the war ends; the euro area 2.3% to 2.8%, against 1.0% to 1.3%. Each range runs between two ways of measuring how fast oil prices pass through to consumer prices (see below).Price model

Consumer prices, % above their no-war level in that year Price model
War ends in 2026Fighting continues into 2027Solid: estimated from past oil shocks (main)Dashed: speed measured in 2026 so far
United States
0 +1% +2% +3% +4% 20262027 +2.6 to 3.9% +0.9 to 2.0%
Euro area
0 +1% +2% +3% +4% 20262027 +2.3 to 2.8% +1.0 to 1.3%

A gap in the price level, not an annual inflation rate. Pass-through estimated with local projections on oil supply shocks, 1992 to 2019 (Jordà, 2005; Känzig, 2021), and as measured in 2026. Energy support policies are taken to be as in past shocks. Provisional.

The lasting cost

Six more months of fighting, years of lower output

In our CGE modelling, the war cuts investment, so the Gulf's capital stock is still below its no-war path in 2030. In our longer-war scenario, plants damaged in 2026 are hit again and take longer to repair, so Qatar's LNG exports are still 14% below normal in 2030 (a scenario input, not a model result). In the model, Qatar's GDP in 2030 is 8.2% below the no-war baseline if the war goes on into 2027 and then ends, against 3.3% if it ends in 2026.CGE model

Modelled real GDP in 2030 against the no-war baseline CGE model
War ends in 2026War goes on into 2027, then ends
0 −3% −6% −9% Qatar −3.3% −8.2% Iraq, Kuwait & Bahrain −0.95% −2.1% Saudi Arabia −0.24% −0.62% UAE −0.10% −0.55% Iran −0.13% −0.26%

% gap from the no-war baseline in 2030; one scale for all economies. Source: our calculations, dynamic CGE model (GTAP-RD), central case. Provisional.

In our CGE modelling, importers lose little GDP: India's GDP is 0.42% below its no-war level in 2027 if the war goes on into 2027, against 0.15% if it ends in 2026. They feel the war mainly through higher energy and consumer prices (see above).CGE model

Scenarios and assumptions

Two war paths

Both scenarios share the same 2026, built from measured data. They differ only in whether the fighting stops at the end of 2026 or resumes in 2027. The extra cost of a longer war is the difference between them, year by year.

Scenario A

The war ends in 2026

Gulf crude oil recovers through 2027, following the US Energy Information Administration's forecast (EIA, 2026), and refined fuel exports are back to normal by mid-2027. Damaged LNG plants, 17% of Qatar's capacity, are back by 2029 (QCintel, 2026).

Scenario B

The war goes on into 2027

Six more months of fighting as intense as the worst month of 2026, not more intense. The Saudi and UAE pipelines that bypass the strait are shut for three months. Iran's exports fall 80% and shipping insurance stays at its peak all year. Once the fighting stops, the lasting damage to oil and gas plants is twice what 2026 left behind (at least 10% of oil capacity), repaired over three years for oil and five for LNG. There is no published forecast for a longer war, so this is a what-if scenario built from measured 2026 data: the worst month, the damage and the repair times all come from what happened in 2026, applied to six more months of fighting.

Full results by economy, industry and year are in the interactive scenario dashboard (Matra, 2026c) and the technical paper (Matra, 2026b), linked at the top of this page.

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Declaration of AI use. The author designed and directed this research, including the questions, methods, data sources and scenario assumptions. AI agents (Claude, made by Anthropic) assisted under the author's direction. They wrote and ran the model and data-processing code, and they produced the charts and presentation materials to the author's specifications. The AI drafted the initial text, and the author then edited, proofread, checked and finalised it. Every code change and set of results was checked independently by the author and by AI models that had not produced it, including Grok (made by xAI). AI tools are not authors of this article. The author approved every result and takes full responsibility for the article's content, including any errors.