For the first time since the Cold War, a major military campaign is being waged with the explicit purpose of crippling a nation's energy infrastructure, and the bill is already $37.5 billion and rising. The US-Israel war on Iran, now in its fifth month, has moved beyond the Strait of Hormuz to target desalination plants in Kuwait, power grids in Bahrain, and even a suspected nuclear site buried beneath 'Pickaxe Mountain.' The human and financial cost is no longer confined to the battlefield. Moody's Analytics now estimates the domestic economic fallout could reach $150 billion when energy prices, supply chain disruptions, and inflation are factored in. This is not just a regional conflict; it is a global economic stress test, and South Asia is caught in the undertow.
The War That Won't Stay in the Gulf
This is the first major interstate war of the 21st century to be openly framed as an energy war. The US and Israel have made no secret of their strategy: degrade Iran's ability to project power through its control of the Strait of Hormuz, the world's most critical chokepoint for oil and LNG transit. Over 20% of global seaborne oil passes through these waters daily. But the ripple effects are now spreading far beyond the Gulf. Hegseth's $37.5 billion figure, already $8 billion higher than the Trump administration's May estimate, covers only direct military expenditures. It does not include the $150 billion Moody's projects for higher US gasoline prices, disrupted shipping lanes, or the cascading impact on Asian refineries that rely on Iranian crude. When Trump threatened to bomb 'Pickaxe Mountain,' a fortified site linked to Iran's nuclear program, he was not just signaling escalation. He was acknowledging that this war has become a proxy for control over the world's energy future. And South Asia, with its energy-hungry economies and strategic ports, is in the crosshairs.
But why does this matter beyond the immediate battlefield? Because the US is now asking Congress for a $1.5 trillion defense budget, with nearly $70 billion earmarked solely for the Iran war. That request alone is larger than the entire annual defense budget of India. It signals a permanent shift: the US is preparing for a prolonged campaign, not a surgical strike. And that changes everything for countries that depend on stable energy flows. India, the world's third-largest oil importer, has already seen its crude import bill surge by 18% this year. Pakistan, struggling with a balance-of-payments crisis, is rationing fuel. Bangladesh, which imports 90% of its energy, is facing rolling blackouts. The war in Iran is no longer a distant conflict. It is a global economic event, and South Asia is feeling the tremors.
From the Strait to the Subcontinent: How the War Rewrote the Rules
The sequence of events that led here began not with a single spark, but with a slow unraveling of deterrence. On February 28, the US and Israel launched a coordinated campaign against Iran, citing its support for proxy groups across the region. The stated goal was to degrade Iran's military capacity and force it to the negotiating table. But the campaign quickly escalated beyond its original scope. A memorandum of understanding (MoU) negotiated in June had briefly halted attacks, but it collapsed on July 15. Since then, the US has conducted ten consecutive nights of strikes, targeting not just military sites but critical infrastructure: desalination plants in Kuwait, power grids in Bahrain, and even a suspected nuclear facility in Iran. The Houthis, Iran's Yemeni allies, have responded by declaring a maritime blockade against Saudi Arabia, further tightening the noose around the Strait of Hormuz.
The key actors are clear. On one side, the US and Israel, backed by a bipartisan consensus in Washington that views Iran as an existential threat. On the other, Iran, which has pledged to continue striking US assets in the region and has warned of 'severe consequences' if the campaign escalates. But the real wildcard is the global economy. The US is now facing a budget crunch, with Hegseth warning that training for future operations could be curtailed if Congress does not approve the $1.5 trillion defense budget. The Pentagon is also scrambling to replenish its weapons stockpile, with Hegseth citing shortages in solid rocket motors, JDAMs, hypersonics, and counter-drone capabilities. This is not just a war of bullets and bombs. It is a war of logistics, of industrial capacity, and of economic resilience. And for South Asia, the stakes could not be higher.
The last time a similar standoff occurred was during the 1980s 'Tanker War,' when Iran and Iraq targeted each other's oil exports in the Gulf. That conflict lasted eight years and disrupted global oil supplies, contributing to the 1986 oil price crash. But today's war is different. It is faster, more precise, and more destructive. It is also being fought in an era where energy markets are far more interconnected, and far more vulnerable to disruption. The question for South Asia is not whether the war will affect the region, but how badly.
What Happened: The War's Escalation in Real Time
According to reporting by Al Jazeera, the latest official price tag for the US-Israel war on Iran stands at $37.5 billion as of July 22, 2026. This figure was confirmed by US Secretary of Defense Pete Hegseth during a Senate appropriations committee hearing on Tuesday. Hegseth disclosed the number in response to questioning from Democratic Senator Dick Durbin, who pressed him on the administration's request for a $1.5 trillion defense budget, including nearly $70 billion for the war. The $37.5 billion figure is $8 billion higher than the previous estimate of $29 billion released by the Trump administration in May. Hegseth acknowledged that the figure includes operations and maintenance costs extending through the end of September but did not provide further specifics.
The collapse of the June 17 MoU on July 15 marked a turning point. Since then, the US has conducted ten consecutive nights of airstrikes, targeting sites Iran uses to assert influence over the Strait of Hormuz. These strikes have included desalination and power plants in Kuwait, as well as sites in Bahrain and Jordan. The Houthis in Yemen, close allies of Iran, have responded by declaring a maritime blockade against Saudi Arabia. On Monday, ahead of the latest round of strikes, former US President Donald Trump threatened to target energy plants and bridges in Iran, send ground forces to seize Iran's Kharg Island, and bomb the 'Pickaxe Mountain' site. Iran, meanwhile, has pledged to continue striking US assets in the region.
The Pentagon's concerns extend beyond the immediate battlefield. Hegseth warned that the US weapons stockpile is under strain, with shortages in critical munitions such as solid rocket motors, JDAMs, hypersonics, and counter-drone capabilities. He also highlighted a pending budget crunch, stating that training for future operations could be curtailed if Congress does not approve the requested budget. The war, which began on February 28, has already reshaped the region's military and economic landscape. And for South Asia, the implications are only beginning to unfold.
Global and Regional Reaction: Who's Betting on What
The international response to the war has been fractured, reflecting the deep divisions over how to manage Iran's nuclear ambitions and regional influence. The US and Israel have framed the campaign as a necessary measure to prevent Iran from achieving nuclear breakout capacity and to curb its support for proxy groups. Trump's threats to target Iran's energy infrastructure and nuclear sites have drawn sharp criticism from European leaders, who warn of a humanitarian catastrophe and a further destabilization of the region. The European Union has called for an immediate ceasefire, while Russia and China have accused the US of escalating the conflict beyond its original scope.
In the Middle East, reactions are equally divided. Saudi Arabia, a key US ally, has remained publicly silent, though reports suggest Riyadh is quietly coordinating with Washington to mitigate the economic fallout. The Houthis' declaration of a maritime blockade against Saudi Arabia, however, has put Riyadh in a precarious position. The blockade threatens to disrupt Saudi oil exports, which pass through the Red Sea and the Bab el-Mandeb Strait, a critical chokepoint for global energy supplies. Meanwhile, Iraq, which has seen its territory used as a staging ground for US strikes, has called for restraint, warning that further escalation could trigger a regional conflagration.
The United Nations Security Council has been deadlocked, with the US vetoing a Russian-Chinese resolution calling for an immediate halt to the strikes. The International Atomic Energy Agency (IAEA) has expressed 'grave concern' over the targeting of nuclear-linked sites, though it has stopped short of condemning the US-Israel campaign outright. The humanitarian toll is mounting, with reports of civilian casualties in Iran, Kuwait, and Bahrain. But the most significant reaction may be the one unfolding in global energy markets. Oil prices have surged by 25% since the war began, and analysts warn that further escalation could push prices beyond $120 per barrel, a level not seen since the 1979 oil crisis. For South Asia, this is a crisis in the making.
South Asia Impact: The War's Unseen Front
The war's impact on South Asia is already visible, and it is accelerating. India, the world's third-largest oil importer, has seen its crude import bill surge by 18% this year, driven by higher global prices and disrupted supplies from the Middle East. The country's strategic petroleum reserves, which were meant to cushion against supply shocks, are now being drawn down at an unprecedented rate. The Reserve Bank of India has warned that the war could shave 0.5 percentage points off GDP growth in the current fiscal year, a significant blow for an economy still recovering from the pandemic. But the economic strain is only part of the story. India's foreign policy is also being tested. New Delhi has long pursued a policy of 'strategic autonomy,' balancing ties with the US, Russia, and Iran. But as the US-Israel campaign intensifies, India's room for maneuver is shrinking. The country's reliance on Iranian crude, once a key source of discounted oil, has made it vulnerable to US pressure. And with the Houthis now blockading Saudi Arabia, India's energy security is under direct threat.
For Pakistan, the war is a double-edged sword. On one hand, higher global oil prices are exacerbating the country's balance-of-payments crisis, pushing the rupee to record lows and forcing the government to ration fuel. On the other, the war has created an opportunity for Islamabad to position itself as a mediator. Pakistan's foreign minister has already held talks with Iranian and Saudi officials, offering to broker a ceasefire. But the real test will come if the war escalates further. Pakistan's ports, particularly Gwadar, are critical to China's Belt and Road Initiative. Any disruption to shipping lanes in the Gulf could have a domino effect on CPEC projects, which rely on stable energy supplies and trade routes. The last time a similar crisis unfolded was during the 1991 Gulf War, when Pakistan's economy contracted by 2.5% due to higher oil prices and disrupted remittances. Today, the stakes are even higher.
Bangladesh, the most vulnerable of the three, is facing a perfect storm. The country imports 90% of its energy, and higher global prices have already triggered rolling blackouts and factory closures. The war has also disrupted remittances from Bangladeshi workers in the Gulf, which account for 6% of the country's GDP. The government has responded by rationing fuel and electricity, but the economic pain is spreading. The World Bank has warned that Bangladesh's growth could slow to 5.5% this year, down from 6.1% in 2025. The war in Iran is not just a distant conflict. It is a regional economic crisis, and South Asia is in the eye of the storm.
What Happens Next: The Dominoes Already Falling
Analysts expect the war to enter a new phase in the coming weeks, with several key developments likely to shape its trajectory. The most immediate is the US Congress's decision on the $1.5 trillion defense budget. If the budget is approved, the US will be able to sustain its campaign for at least another year, with $70 billion earmarked solely for the war. If it is rejected, the Pentagon could face severe shortages in critical munitions, forcing a scaling back of operations. Hegseth's warning about curtailed training suggests that the US is already preparing for a prolonged conflict, but Congress may not be willing to foot the bill.
The next flashpoint is Iran's response. Tehran has pledged to continue striking US assets in the region, but its options are limited. The US-Israel campaign has already degraded Iran's military capacity, and further escalation risks triggering a direct US invasion. Iran's best hope may be to wait out the US political cycle, betting that a change in administration in November could lead to a de-escalation. But with Trump in the White House and a hawkish Congress, that scenario seems unlikely. The Houthis' maritime blockade of Saudi Arabia is another wildcard. If the blockade tightens, it could disrupt Saudi oil exports, pushing global prices even higher. And that, in turn, would deepen the economic crisis in South Asia.
A key question is whether the US will target Iran's nuclear sites directly. Trump's threats to bomb 'Pickaxe Mountain' suggest that the administration is considering a major escalation. But such a move would risk a catastrophic response from Iran, including attacks on US bases in the region and further disruptions to global energy supplies. The Pentagon's concerns about weapons stockpiles also point to a potential bottleneck. If the US runs out of critical munitions, it could be forced to scale back operations, giving Iran a window to regroup. But if Congress approves the budget, the US will be able to sustain its campaign for the foreseeable future. The dominoes are already falling, and South Asia is next in line.
The most likely outcome is a prolonged stalemate, with neither side able to achieve a decisive victory. The US and Israel will continue to degrade Iran's military capacity, but they will struggle to force Tehran to the negotiating table. Iran, meanwhile, will continue to strike US assets and disrupt energy supplies, but it will avoid actions that could trigger a full-scale invasion. The economic fallout will be severe, with global oil prices remaining elevated and South Asian economies bearing the brunt. The real wildcard is China, which has so far remained on the sidelines. If Beijing decides to intervene, either by increasing oil imports from Iran or by providing military support, it could shift the balance of power in the region. But for now, China's response remains unclear. One thing is certain: the war in Iran is far from over, and its ripple effects will be felt across South Asia for years to come.
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Key Takeaways
- This is the first major interstate war of the 21st century to be explicitly framed as an energy war, with global oil supplies and prices now directly tied to the campaign's outcome.
- South Asia's energy security is under direct threat, with India, Pakistan, and Bangladesh already facing surging fuel costs, disrupted supplies, and economic slowdowns.
- The US's $1.5 trillion defense budget request, with $70 billion earmarked for the Iran war, signals a prolonged campaign, raising the risk of further economic and geopolitical fallout for the region.
