The hidden cost of instability

On February 28, 2026, Iran closed the Strait of Hormuz. For most companies, the headline landed as background noise: another crisis, another distant region. But Hormuz is not distant. It is in your supply contracts, in next quarter's energy bill, in the investment plans you are deferring while waiting for clarity.

We built a model on fifty years of Middle East conflicts and ten historical episodes. Not to comment on the crisis, but to measure its impact before it arrives. What the analysis shows:

• -4.2% forecast decline in industrial output over 6 months
• 58% of Italian gas now exposed to MENA
• 1.15 percentage points: the impact of uncertainty on investment
• 38% of extra-EU trade passes through Suez

For fifty years the logic was linear: Middle East conflict means more expensive oil. More expensive oil means higher costs for producers. Still true. But it is the least dangerous part of the equation.

At Vedrai Observatory we built a causal model across nine transmission channels, fifty years of data and ten conflict episodes. Not a correlation: a structure that isolates each channel and measures its independent impact on the Italian economy. The finding that overturned expectations? The dominant channel is not oil. It is uncertainty itself. When geopolitical risk spikes, something very specific happens in Italian boardrooms: investment decisions get deferred. Not cancelled. Deferred. The approved machinery order slips to next quarter. The new production line waits for clarity. The acquisition is put on hold.

Each decision is individually rational. Collectively, the effect is devastating: a geopolitical risk spike reduces Italian fixed investment growth by 1.15 percentage points within five months, nearly double the impact of an equivalent oil shock. And this sensitivity has doubled since 2014.

Every CEO deferring capex while "waiting to see how things develop" is individually rational. Collectively, they are contributing to the very industrial decline they fear.

In 2022 Italy did the right thing: it replaced Russian gas. In three years, the Russian share of supply collapsed from 41% to under 5%. A genuine policy achievement.
But where did the replacement gas come from? Algeria, Qatar, Libya. The share of Italian gas from suppliers exposed to the Middle East and North Africa rose from 34% to 58% in just four years.

The result: 22.4% of Italian electricity now depends on gas exposed to the Middle East, up from 16.6% in 2005. Renewables have grown to 42% of the electricity mix. Yet specific vulnerability to Middle East shocks has increased. We traded Russian pipeline risk for Mediterranean risk.
When Iranian drones struck the Ras Laffan facility in Qatar in early March 2026 (forcing QatarEnergy to declare force majeure on LNG deliveries), they hit an installation that supplies 16.5% of Italian gas. In 2011, it supplied virtually none.

The European comparison that matters is not with Germany. The real outlier is Spain.
Across the thirty years analysed, Spanish manufacturing remained largely immune to Middle East conflicts. Italian manufacturing lost an average of 2.7% of industrial output per episode. Three structural factors explain almost the entire gap:

• Suez dependence: 38% of Italian extra-EU trade transits Suez, versus 22% for Spain.
• Middle East gas: 39% of Italian imports, versus 19% for Spain.
• Energy-intensive industry: 33% of Italian manufacturing, versus 21% for Spain.

The uncomfortable conclusion: Italy's vulnerability is structural, not cyclical. It will not disappear when the current crisis ends.
With the Hormuz closure simultaneously activating all three main transmission channels for the first time since 1973-74, Vedrai's model forecasts a 4.2% decline in Italian industrial production relative to trend within six months, more severe than the Gulf War of 1990-91.

The research points to three immediate priorities for manufacturing CEOs:

• Map your true exposure. Not just energy costs, but the routes transiting Suez and Hormuz, exposed suppliers, force majeure clauses in logistics contracts.
• Build six months of shock liquidity. A 10-15% rise in energy costs and a potential doubling of container freight rates: that is the window to cover.
• Stop waiting for certainty. The cost of waiting is measurable: approximately 1.4 percentage points of capital formation growth lost per major geopolitical shock.