Commentary: The economic consequences of escalating tensions in the Gulf and the potential impact on global oil prices and inflation

"Although oil prices remain below their inflation-adjusted peaks in 1979 and 2008, the underlying global economy is weaker than it was during those periods. As a result, it cannot absorb higher inflation without severely limiting growth or inducing a recession. Capturing Iran is therefore unlikely to be worth the economic costs at this time.

"Markets had initially assumed this would be a short conflict and that inflationary pressures would remain muted. However, it now appears that de-escalation efforts have failed. We can therefore expect markets to begin repricing the risk of a longer war, along with more persistent inflation.

"The release of significant strategic reserves this week will only temporarily calm markets. The potential loss of oil production now mirrors the fears seen at the peak of the 1990 Persian Gulf War, when oil prices rose by 135% within two months. Without de-escalation, we may now be facing a similar scenario in which prices continue to trend upwards.

"An upward price spike is particularly likely given that global strategic reserves cover only around 5% of annual demand, while European natural gas reserves have already fallen to 39% of capacity."