The ‘Great Settlement’ That Could Decide Price Of Iran War World Will Pay

By K Raveendran

The promise of a ‘great settlement’ from President Trump has been enough to pull oil prices lower, calm equity markets and revive hopes that the Strait of Hormuz may return to normal traffic. Yet it shows how fragile the relief remains. A diplomatic opening can move prices in an instant, but a durable settlement is still measured not by words, but by tanker movements, insurance rates, military restraint and the willingness of adversaries to accept terms that each can sell at home.

The stakes are unusually large because Hormuz is not merely a regional waterway. It is one of the principal arteries of the world economy, carrying a share of oil and gas flows large enough to affect inflation, fiscal policy, trade balances and political stability far beyond the Gulf. In 2024, oil flows through the strait averaged about 20 million barrels a day, equal to roughly one-fifth of global petroleum liquids consumption. Much of that flow is directed towards Asia, making the crisis especially consequential for import-dependent economies such as India, China, Japan and South Korea.

That is why analysts’ warning of oil reaching $150 a barrel if the closure extends beyond 30 days cannot be treated as another speculative upper bound. Oil markets can absorb shocks for a time through inventories, rerouting, emergency releases, weaker demand and covert shipments. But the longer a chokepoint disruption continues, the more those buffers erode. The danger is not a straight-line rise in prices; it is a non-linear break in confidence once traders conclude that the shortage is no longer temporary. At that point, the market prices not only lost barrels but also fear, insurance, military risk and the cost of replacing secure supply chains with improvised ones.

A $150 oil price would be an unmitigated setback for a global economy already conditioned by years of war, sanctions, supply-chain redesign and high borrowing costs. Energy-importing countries would face a direct deterioration in their current accounts, while governments would confront the old dilemma of either passing costs to consumers or absorbing them through subsidies. The first option raises inflation and public anger; the second worsens fiscal balances. Central banks, already wary of declaring victory over inflation too early, would find it harder to cut rates. Companies would delay investment. Households would reduce discretionary spending. For poorer countries, the shock would be sharper because fuel imports compete directly with food, debt service and development spending.

The crisis also exposes a structural imbalance in globalisation. The world has diversified technology supply chains, financial flows and manufacturing platforms, but energy security still rests on narrow maritime corridors. Alternative routes exist for some Gulf output, yet they are not sufficient to replace Hormuz at scale, especially for liquefied natural gas. A prolonged closure would therefore hit crude, LNG, petrochemicals, fertilisers and shipping costs simultaneously. The effect would move through the economy in waves: first through oil prices, then transport and electricity costs, then food prices, industrial margins, consumer confidence and sovereign risk.

The Institute for Economics & Peace estimate that the Iran war could reduce global GDP by about 0.6 per cent in its first year is striking precisely because it captures only the measurable part of a much wider shock. A fraction of global output may sound small in isolation, but at current world GDP levels it represents hundreds of billions of dollars in lost activity. The estimate also sits beside a more revealing figure: successful diplomacy that prevents further escalation could generate about $2.2 trillion in economic benefits globally. That is the real price tag of peace. It turns diplomacy from a moral preference into a macroeconomic asset.

Trump’s political instinct has always been to frame diplomacy as transaction, spectacle and personal leverage. That approach can be destabilising when it compresses complex conflicts into claims of imminent breakthroughs. Yet in this case, the market reaction shows that even the hint of a settlement has practical economic value. Oil fell sharply on expectations of a deal because traders understand that the largest risk premium in the market is not geological scarcity but political obstruction. If Hormuz reopens credibly, the war premium can unwind quickly. If the talks fail, the same premium can return with greater force because disappointed markets often reprice risk more aggressively than markets that never believed in relief.

The hard question is what kind of settlement would be durable. A narrow deal that merely restores commercial transit could lower oil prices and ease immediate pressure, but it would not necessarily resolve the military and nuclear questions that produced the crisis. A broader deal would need to address shipping guarantees, sanctions relief, frozen assets, nuclear limits, regional proxies and the security concerns of Gulf states as well as Israel. Each item carries domestic political costs for one or more parties. Iran cannot appear to surrender control of its strategic leverage. Washington cannot appear to reward escalation. Gulf states need continuity of exports without becoming permanent hostages to the next confrontation. Israel will judge any settlement by whether it reduces or merely postpones threats.

That is why the ‘great settlement’ appears both instant and distant. It is instant because markets, governments and publics are desperate for a release valve. A single credible signal can change the price of oil, the tone of diplomacy and the calculations of shipping firms. It is distant because the underlying architecture of mistrust remains intact. The Gulf crisis is not only about a blocked strait; it is about the collapse of confidence that rules, deterrence and diplomacy can still contain regional rivalry before it becomes systemic economic warfare.

For India and other Asian economies, the lesson is immediate. The exposure is not limited to the pump price. It extends to fertiliser costs, aviation fuel, shipping insurance, remittances, Gulf employment, trade finance and the rupee’s vulnerability to higher import bills. A Hormuz shock would arrive through inflation before it arrives through official growth data. It would test fiscal discipline, monetary policy and emergency planning at once. Strategic reserves and diversified suppliers can soften the blow, but they cannot fully neutralise a prolonged disruption in a corridor through which such a high share of Asian energy demand moves.

The wider geopolitical implication is that peace has become an economic infrastructure issue. Pipelines, ports, tankers and reserves matter, but so do channels of communication between enemies. A world that spends more on weapons while relying on fragile chokepoints for energy is structurally exposed to sudden repricing of risk. The IEP’s $2.2 trillion diplomacy dividend is therefore not an abstract peace advocacy number; it is a measure of avoided recessionary pressure, avoided inflation, avoided fiscal distress and avoided escalation.

The settlement, if it comes, will not erase the war’s consequences. It will merely decide whether the world absorbs a severe but contained shock or enters a longer phase in which energy insecurity becomes the organising principle of global economics. The immediate drama is whether Trump can convert a claim of imminent peace into a verifiable opening of Hormuz. The deeper issue is whether the world economy can keep treating peace as a diplomatic afterthought when the cost of failure is counted in oil prices, GDP losses and the stability of nations far from the battlefield. (IPA Service)

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