The escalating confrontation between the United States and Iran has all the ingredients of a conflict that could stretch far beyond initial expectations. Not because the two countries are evenly matched in military power — they are not — but because their strategies, costs, and economic leverage are very different.
While the U.S. commands one of the most powerful and technologically advanced militaries in the world, Iran has spent decades preparing for a different kind of fight — one designed to stretch the conflict, increase costs, and create pressure far beyond the battlefield.
To understand why this war could become prolonged, it helps to look beyond missiles and aircraft and focus on the economics of conflict.
U.S. vs Iran: The Cost Asymmetry
The United States spends far more on defence than Iran — about $886 billion in fiscal year 2026, compared with Iran’s $15–30 billion. While this gap suggests overwhelming US military strength, it also brings a hidden challenge: modern warfare for the U.S. is extremely expensive, with deployments, missile strikes and naval operations quickly adding billions to the cost of any conflict.
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Much of this pressure comes from the price of advanced weapons. A Tomahawk cruise missile costs roughly $2–3 million, while some missile interception systems can reach $44 million per intercept. By contrast, Iran often relies on cheaper drones and missiles costing between $20,000 and $2 million, enabling it to launch them in large numbers and potentially force the U.S. into an expensive defensive response.
As a result, although Iran’s military operates with far fewer resources, its structure is built around lower-cost warfare, which could make sustaining a prolonged conflict relatively easier for its economy compared with the much larger but more expensive U.S. defence machine.
The Economic Battlefield: The Strait of Hormuz
Perhaps the most powerful lever in Iran’s strategy is not military at all — it is geographic.
The Strait of Hormuz, a narrow waterway just 21 miles wide, is one of the most critical energy routes in the world.
Approximately:
• 27% of global maritime oil trade passes through this route
• 20% of global LNG (liquefied natural gas) trade flows through it
And the disruption here has shaken global energy markets.
Iran has warned that oil prices could surge toward $200 per barrel if the conflict escalates further. In recent days, Iranian forces have attacked several merchant vessels in the Gulf, while missile strikes continue across the region.
In this sense, Iran’s long-term strategy may not be to defeat the U.S. militarily, but to apply pressure through the global economy — raising the economic costs of conflict until international powers push for de-escalation.
Why Europe Could Be the Biggest Casualty
While the conflict is centred in the Middle East, the economic shockwaves could be felt most strongly in Europe.
Europe remains highly sensitive to energy supply disruptions, particularly after the 2022 energy crisis that followed the Russia–Ukraine war.
The region’s most immediate vulnerability is liquefied natural gas (LNG).
Any disruption to LNG shipments through the Strait of Hormuz could sharply tighten global supply, forcing Europe to compete more aggressively with Asian buyers for available cargoes.
And timing makes this risk even more dangerous.
European gas storage is expected to be only 22–27% full by the end of March, significantly below the five-year average of about 41%.
If LNG shipments slow over the next few weeks, inventories could fall even further — pushing gas prices sharply higher.
ECB analysis:
According to ECB analysis from December, a 14% increase in oil prices could:
• Raise inflation by about 0.5 percentage points
• Reduce GDP growth by around 0.1 percentage points
And that estimate reflects only the price impact — not potential supply disruptions.
This situation strongly resembles the European energy crisis of 2022, when gas supplies from Russia were reduced following sanctions during the Ukraine war.
At that time, energy prices surged and the euro weakened sharply.
A prolonged Middle East disruption could create similar pressures again.
Qatar’s LNG Disruption Raises the Stakes
Additional tensions have escalated after drone strikes halted LNG exports from Qatar, the world’s third-largest LNG exporter, which accounted for about 19% of global LNG exports in 2025.
Although Europe imports only around 7% of its LNG directly from Qatar, the market is highly interconnected. Major Asian buyers — China, India, Japan, and South Korea — depend far more on Qatari supply. Any disruption would push them to compete for cargoes from other exporters, driving global LNG prices higher for everyone.
Technical Outlook for EURO:
Against this backdrop, ongoing geopolitical tensions and persistent energy vulnerabilities continue to weigh on the euro.
Without a meaningful improvement in Europe’s energy security outlook, the EUR/USD pair is likely to remain under pressure. From a technical perspective, the currency could potentially move toward the 1.1300–1.1400 range in the near term.
(The author Amit Pabari is MD, CR Forex Advisors)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)