After Israel launched its unprecedented air strike on Iran’s nuclear program June 13, dramatic video soon emerged of critical oil and gas infrastructure that was also targeted.
In Tehran, flames engulfed an oil depot and a refinery that were struck by Israel. The vast South Pars gas field – the largest in the world – was also targeted. Iran’s oil and gas exports have slowed to a trickle.
But Iran’s retaliation against Israel, with some 400 ballistic missiles launched as of late Tuesday, also yielded dramatic scenes of leaping flames and industrial impact.
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Iran’s prewar economy was beleaguered, while Israel’s showed signs of recovery. Both have struck industrial targets, yet neither so far seems bent on systematically degrading important infrastructure. Still, a long conflict will test their resilience.
One of Israel’s two refineries, in Haifa, was shut down after the power station it relied upon was struck by Iran. And Israel reportedly has shut down two of its three offshore natural gas fields, significantly lowering gas exports.
Oil prices leapt 7% when Israel began its attack, though they have eased since neither Israel nor Iran appear committed – so far – to systematically degrading each other’s most important energy infrastructure.
Still, the current disruption to energy supplies raises questions about how vulnerable each economy is to enemy strikes – and about the potential impact of a conflict that could last weeks or months.
In Iran, years of strict American and European sanctions, and economic mismanagement, combined even before Israel’s attack to wreak havoc on the economy and the value of Iran’s currency. Over the years, painful economic reforms and price hikes have triggered street protests, which were put down violently.
But the sustained burden of those factors has also resulted in a degree of resilience among Iranians.
“If the war were to expand and more critical infrastructure were to be hit, then of course it would have a really dramatic impact on Iran’s economy,” says Esfandyar Batmanghelidj, CEO of the Bourse & Bazaar Foundation, a London-based economic think tank.
Key signs will be electricity availability, seen in the number of brown-outs and black-outs, he says, as well as the results of any further Israeli strikes on refineries, oil depots, and natural gas pipelines.
Morteza Nikoubazl/NurPhoto/AP
“It’s about whether there is gas for cars, and enough natural gas to run the power and industrial plants,” says Mr. Batmanghelidj. He likens the current impact on Iran to shutdowns during the COVID-19 pandemic.
“People leaving big cities, businesses getting shuttered, factories going dormant – that is what really indicates that Iran’s economy is slowing down,” he says. “The question here is, if Israel increases hits on critical infrastructure, would Iran be able to retaliate [in kind] in Israel?”
Signs of recovery in Israel
That question is also top of mind in Israel, where the economy has been showing signs of recovery after the 20 months of war in Gaza that have followed the Oct. 7, 2023, attack by Hamas. The first quarter of this year saw an annualized 3.4% growth in Gross Domestic Product, compared with 2.5% the previous quarter.
But the waves of Iran’s retaliatory strikes threaten that trajectory, as densely populated areas and key infrastructure like oil refineries become targets, forcing workers to stay home.
“If we enter a long campaign of missiles … that will make it harder for our economy to recover and return to routine,” says Itai Ater, an economics professor at Tel Aviv University.
“If it is going to take just a few days, we can hunker down and take deep breaths,” he says. “But what if things take longer? Without tourism, flights, and with people stranded abroad, schools shuttered and people not working, over time, who will pay for all of this?”
Ratings agencies are sounding a degree of optimism about the Israeli economy, if the war remains limited to a few weeks. Despite rising geopolitical and security risks, Fitch Ratings said on June 16, that “Israel has strong defensive counter measures, and it appears that Iranian strikes have not had a material economic impact.”
Still, because of Israel’s small size and high population density, S&P Global Ratings warned the same day that the social and fiscal outcome from infrastructure damage could be “sizable.”
Israel’s high-tech sector makes up 20% of GDP and 50% of exports. It is the economy’s growth engine and generally resilient during crises, as workers shift online and work remotely to keep projects afloat.
“This should somewhat cushion the impact,” S&P wrote.
Investors in the stock market and Israeli currency also appear to be betting on the economy, says Yaniv Pagot, executive vice president for trade and indices at the Tel Aviv Stock Exchange.
From the market’s reopening on Sunday through the close of trading Wednesday, two key Israeli indices rose 4.1% and 5%, respectively. Meanwhile, the shekel strengthened against the dollar and euro Monday through Wednesday, as Israel appeared to be advancing goals in Iran.
“For the past 20 to 30 years, the Iranian threat has been a glass ceiling for Israel’s economy,” says Mr. Pagot. “If Israel succeeds in eliminating the nuclear threat, the economic risk will drop considerably, and that has a huge economic significance. We are not there yet, but investors now see a much greater chance of us getting there than before the escalation.”
Political stability targeted?
In Iran, meanwhile, high hopes accompanied the recent nomination of Seyed Ali Madanizadeh as the new minister of economy. With a master’s from Stanford and PhD from the University of Chicago, he was seen as well equipped, before the war, to better manage the economy.
The youthful Mr. Madanizadeh – he was not even born at the time of the 1979 Islamic Revolution – was confirmed Monday. His job will now include helping Iran cope with the impact of the war – and the fallout, if Israel’s strategy includes a broader set of economic targets aimed at regime change.
“There is a very mechanical view that, if the economic situation gets worse, the Iranian people will get angry about it, and overthrow their government – and that is their deliverance from the economic situation getting worse,” says Mr. Batmanghelidj of Bourse & Bazaar.
“That is not really how this works,” he says. “The underlying problem is that destabilization of Iran politically is incompatible with the kinds of economic outcomes people want.
“It’s not as if a breakdown of the political leadership leads to better management of the economy overnight,” says Mr. Batmanghelidj. “So if we end up in that situation, people are going to be worse off – even if they succeed in creating a political transition.”
