WASHINGTON (AP) – The war with Iran causes collateral damage to the global economy.
The conflict is driving up energy and fertilizer prices; looming food shortages in poor countries; destabilize fragile states like Pakistan; and complicate options for central bank inflation fighters like the Federal Reserve.
At the origin of much of the evil: Iran closed the Strait of Hormuz – through which a fifth of the world's oil passes – after the United States and Israel launched missile strikes on February 28 that killed Iranian leader Ayatollah Ali Khamenei.
“For a long time, the nightmare scenario that dissuaded the United States from thinking about an attack on Iran and led it to call for restraint toward Israel was that the Iranians closed the Strait of Hormuz,” said Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics and former chief economist of the International Monetary Fund. “Now we are in the nightmare scenario.”
With a key shipping route cut off, oil price have surged – from less than $70 a barrel on Feb. 27 to a high of nearly $120 early Monday before edging closer to $90. They took gas prices with them.
According to AAA, the average price of gasoline in the United States has climbed to $3.48 per gallon, up from just under $3 a week ago. Prices could be felt even more strongly in Asia and Europe, which rely more on Middle Eastern oil and gas than the United States.
20 million barrels of oil disappear every day
Every 10% increase in oil prices – provided it persists for most of the year – will increase global inflation by 0.4 percentage points and reduce global economic output by up to 0.2%, said Kristalina Georgieva, managing director of the International Monetary Fund.
“The Strait of Hormuz must be reopened,” said economist Simon Johnson of the Massachusetts Institute of Technology and winner of the 2024 Nobel Prize in Economics. “20 million barrels of oil pass through it every day. There is no excess capacity anywhere in the world that can fill this gap.
The global economy has shown it can roll with the punches, absorbing blows from Russia's invasion of Ukraine four years ago and President Donald Trump's massive, massive intervention. unpredictable prices in 2025.
Many economists hope that global trade will manage to overcome the latest crisis.
“The global economy has proven capable of withstanding significant shocks such as the U.S. tariffs, so there is reason to be optimistic about its resilience to the fallout from the war with Iran,” said Eswar Prasad, a trade policy professor at Cornell University.
Timing is everything
Especially if oil prices can fall back into the $70-$80 per barrel range, writes economist Neil Shearing of Capital Economics, “the global economy could absorb the shock with less disruption than many fear.”
But there are still a lot of ifs.
“The question is how long is this going to last?,” said Johnson, also a former chief economist of the IMF. “It is difficult to see Iran backing down now that it has announced its new leader.” Mojtaba Khamanei. The murdered Ayatollah's son is said to be even more of a hardliner than his father.
Uncertainty about what the United States is trying to achieve also makes prospects for ending the crisis murky. “It’s all up to President Trump,” Johnson said. “We don’t know when he will declare victory.”
Economic winners and losers
For now, the war will likely produce economic winners and losers.
Energy importers – most countries in Europe, South Korea, Taiwan, Japan, India and China – will be hit by rising prices, Shearing wrote in a commentary for the Chatham House think tank in London.
Pakistan finds itself in a particularly bleak situation. This South Asian country imports 40% of its energy and is particularly dependent on liquefied natural gas from Qatar, the supply of which has been interrupted by the conflict. Rising energy prices will weigh on Pakistani families and hurt their economy.
Far from cutting interest rates to provide some relief, the country's central bank will probably have to raise them, say economists Gareth Leather and Mark Williams of Capital Economics. This is partly because inflation remains uncomfortably high in Pakistan – and rising energy prices threaten to make the situation worse.
But oil-producing countries outside the war zone – Norway, RussiaCanada – will benefit from high oil prices without the risk of missile and drone attacks.
Energy is not the only problem. Up to 30% of global fertilizer exports – including urea, ammonia, phosphates and sulfur – pass through the Strait of Hormuz, according to Joseph Glauber of the International Food Policy Research Institute.
Disruptions in the strait have already disrupted fertilizer shipments, increasing costs for farmers – and likely driving up food prices.
“All countries with a significant agricultural sector, including the United States, would be vulnerable,” Obstfeld said. “The effects will be most devastating in low-income countries where agricultural productivity may already be strained. Add this additional cost element and you get the prospect of significant food shortages.
Where are things in the United States?
The United States, now a net exporter of energy, should overall benefit slightly from rising oil and gas prices. But ordinary families will feel the pain at a time when Americans are already furious on high costs ahead of the November midterm elections.
American households pay $2,500 a year, or nearly $50 a week, to fill up their cars, said Mark Mathews, chief economist at the National Retail Federation. A 20% increase in gas prices means an extra $10 per week on their budget, forcing them to make cuts elsewhere. “If I have to pay more for an essential item, then I would discount a discretionary item,” Mathews said.
If oil prices stay around $100 a barrel, Evercore ISI analysts calculated, the resulting rise in gasoline prices would wipe out for most Americans the benefits of higher tax refunds this year resulting from Trump's tax cuts for 2025. Only the richest 30% would still see a gain.
A dilemma for central banks
The Iranian crisis is also putting the world's central banks in a bind. Rising energy prices are fueling inflation. But they also hurt the economy. So should central bankers raise rates to curb inflation – or cut them to give the economy a boost?
The Fed is already divided between policymakers who think the weak U.S. labor market needs to be helped by lowering rates and those who still fear inflation will remain stuck above the central bank's 2% target.
“They will easily think of the 1970s,” Johnson said, when the Middle East conflict and the Arab oil embargo caused oil prices to skyrocket. Central bankers are haunted by the memory that their predecessors “didn’t get it right in the 1970s.” They thought it was a temporary shock. They thought they could adapt to lower interest rates, and they ended up regretting it because inflation became much higher.
Johnson predicted that rising energy prices triggered by the war with Iran “will massively intensify the debate within the Fed” and make a U.S. rate cut less likely.
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AP Retail writer Anne D'Innocenzio in New York and AP Economics writer Christopher Rugaber in Washington contributed to this report.
