The closure has pushed crude oil from under $70 a barrel to a peak of nearly $120 before settling near $90, while US average gasoline prices climbed to $3.48 a gallon from under $3 the prior week, according to AAA. Economists warn the shock threatens to reignite inflation, squeeze fragile economies from Pakistan to East Asia, and leave central banks — including the Federal Reserve — with no clean response.
The war with Iran is sending energy prices sharply higher and threatening food supplies worldwide, economists warned Monday, as the Strait of Hormuz — through which roughly one-fifth of the world’s oil flows — remains largely shut following the Feb. 28 US-Israeli strikes that killed Iranian Supreme Leader Ali Khamenei.
The closure has pushed crude oil from under $70 a barrel on Feb. 27 to a peak of nearly $120 Monday morning before settling near $90. US average gasoline prices climbed to $3.48 a gallon from under $3 the prior week, according to AAA.
The shock threatens to reignite inflation, squeeze fragile economies from Pakistan to East Asia, and leave central banks — including the Federal Reserve — with no clean policy response.
Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics and a former IMF chief economist, said the closure represents precisely the scenario that had long deterred the United States even from contemplating an attack on Iran and had led US officials to urge restraint on Israel. That nightmare scenario, he said, is now reality.
Twenty million barrels a day offline
Simon Johnson, an MIT economist and winner of the 2024 Nobel Prize in Economics, said 20 million barrels of oil per day flow through the Strait of Hormuz, and there is no spare capacity anywhere in the world to cover the gap.
IMF Managing Director Kristalina Georgieva said every 10% increase in oil prices — if sustained for most of the year — raises global inflation by 0.4 percentage points and reduces global economic output by up to 0.2%.
Many economists expressed cautious optimism that the global economy would again prove resilient, noting it had absorbed the shock of Russia’s invasion of Ukraine four years ago and the sweeping US tariffs of 2025. Eswar Prasad, a trade policy professor at Cornell University, said those precedents provide grounds for optimism that the global economy will manage the Iran war’s consequences as well.
But that optimism carries conditions. Economist Neil Shearing of Capital Economics wrote that if oil prices can return to the $70-to-$80-per-barrel range, the global economy could absorb the shock with less disruption than many fear. Many uncertainties remain, he wrote in commentary for the Chatham House think tank in London.
Winners and losers
The conflict is creating clear economic winners and losers.
Energy importers face the sharpest pain. Europe, South Korea, Taiwan, Japan, India, and China all depend more heavily on Middle Eastern oil and gas than the United States does, Shearing wrote. Energy-exporting nations outside the conflict zone — Norway, Russia, and Canada among them — stand to gain from elevated crude prices without facing missile and drone strikes.
Pakistan is in a particularly difficult position. The South Asian country imports 40% of its energy and relies heavily on liquefied natural gas from Qatar, supplies that have been disrupted by the conflict. Capital Economics economists Gareth Leather and Mark Williams said Pakistan’s central bank will likely be forced to raise interest rates rather than cut them, because higher energy prices threaten to push already-elevated domestic inflation further upward.
Food prices at risk
Energy is not the only vulnerability. Up to 30% of global fertilizer exports — including urea, ammonia, phosphates, and sulfur — pass through the Strait of Hormuz, said Joseph Glauber of the International Food Policy Research Institute. The disruption has already cut fertilizer shipments, driving up costs for farmers and pushing food prices higher.
Obstfeld warned that any country with a significant agricultural sector, including the United States, faces exposure. He said the effects would be most devastating in low-income countries where agricultural productivity is already under strain, warning that the added cost burden raises the prospect of significant food shortages.
US households feel the squeeze
Although the United States is now a net energy exporter and may see some aggregate economic benefit from higher oil prices, ordinary American households will feel the impact. US households spend about $2,500 a year — roughly $50 a week — filling their gas tanks, according to Mark Mathews, chief economist of the National Retail Federation. A 20% increase in gasoline prices would cost those households an additional $10 a week, Mathews said, forcing cutbacks in discretionary spending.
The timing is particularly fraught. Americans are already angered by elevated living costs ahead of November’s midterm elections. Evercore ISI analysts calculated that if oil prices hold near $100 a barrel, the resulting gasoline price increase would wipe out for most Americans the benefit of larger tax refunds they were expecting from President Trump’s 2025 tax cuts. Only the top 30% of earners would still see a net gain, the analysts said.
A dilemma for central banks
The conflict has placed the world’s central banks in a bind. Higher energy prices feed inflation, but they also slow economic growth — leaving policymakers without a clean response.
The Federal Reserve was already divided before the crisis, with some officials believing a weakening US labor market needed support from lower interest rates and others fearing inflation remained stuck above the central bank’s 2% target.
Johnson said higher energy prices from the war will intensify the debate within the Fed and make rate cuts less likely. He said central bank officials would find their thinking drawn back to the 1970s, when conflict in the Middle East and an Arab oil embargo sent crude prices soaring. He said their predecessors misjudged that episode — treating the shock as temporary, accommodating it with lower rates, and watching inflation rise far higher than anticipated as a result.
Duration is the key question
How long the strait remains disrupted may determine whether the global economy escapes severe damage.
Johnson said he found it difficult to envision Iran backing down now that it has announced a new leader — believed to be Mojtaba Khamenei, son of the killed ayatollah, and described by analysts as even more intransigent than his father.
Uncertainty about US objectives compounds the problem, Johnson said. It remains unclear, he said, when President Trump intends to declare victory.