As the United States and Israel’s war on Iran unfolds in the coming days and weeks, the scale of the global economy’s collapse will be measured at the petrol pump.
One of the biggest risks that conflict poses to global economic health is rising energy prices.
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The effective closure of the Strait of Hormuz and Iranian attacks on key energy production facilities in Qatar and Saudi Arabia have disabled a substantial portion of the world’s energy supply.
For a global economy already reeling from U.S. President Donald Trump’s tariffs and seen by many as unraveling the post-World War II order, it depends on how long the disruption lasts.
A continuous rise in energy prices increases the cost of daily commodities.
Central banks can raise borrowing costs to curb inflation, dampen consumer spending and drag down economic growth.
“It’s really a question of how long the disruption to the flow through the Strait of Hormuz will last and whether there will be destruction of physical assets,” said Anne-Sophie Carbou, an analyst at Columbia University’s Center for Global Energy Policy.
“For now, the market doesn’t value a small disruption and any destruction. But that could change in the future. We don’t know now how this whole crisis will end.”
Although Iran’s threats to shipping have halted traffic through the Strait of Hormuz, a route for a fifth of the world’s oil, crude prices have seen relatively modest gains so far.
Brent crude oil hovered around $84 a barrel on Friday morning, US time, up about 15 percent from pre-conflict prices.
Those gains pale in comparison to previous crises.
During the 1973-74 oil embargo led by OPEC’s Arab members, prices quadrupled in just three months.
Since then, the world’s dependence on Middle Eastern oil has declined significantly.
Today, according to the US Energy Information Administration, Iran, Iraq and the UAE combined produce about 13 million barrels per day, making the US the largest producer globally.
But if supply disruptions extend beyond a few weeks, oil prices could rise sharply.
Storage capacity constraints
According to an analysis by JPMorgan Chase, the seven oil-producing Gulf states – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE – could run out of crude oil storage capacity within a month if the Strait of Hormuz is closed.
When storage capacity declines, producers are forced to cut production.
“While there is some capacity elsewhere and some options to use pipelines instead of ships, it’s incredibly difficult to replace the entire volume as we’re talking about an average of 20 million barrels of oil per day crossing the Strait of Hormuz,” said Sarah Schiffling, a supply chain expert at the Hanken School of Economics.
“This important maritime chokepoint provides very significant leverage in the global economy.”
This week, Goldman Sachs analysts estimated that global oil prices could reach $100 a barrel — a threshold not seen since Russia’s 2022 invasion of Ukraine — if shipments by waterway remain at current low levels for five weeks.
In an interview published by The Financial Times on Friday, Qatar’s Energy Minister Saad Al-Kaabi warned that producers in the region could stop production within days and that oil could rise as high as $150 a barrel.
Such increases will reverberate through the global economy.
The International Monetary Fund estimates that for every 10 percent increase in oil prices, global economic growth will decrease by 0.15 percent.
Pain is not evenly distributed.
About 80 percent of the oil transported through the strait goes to Asia.
India, Japan, South Korea and the Philippines, which depend heavily on foreign energy imports, are among the economies most vulnerable to rising costs of necessities such as food and fuel.
“The impact will be felt particularly in Asia and Europe,” said Lutz Killian, an economist at the Federal Reserve Bank of Dallas.
“Some countries, like China, have enough oil reserves to support a temporary shutdown, while others don’t.”
Liquefied natural gas (LNG), which is transported across the strait and has fewer alternative suppliers outside the region than crude oil, has already seen steeper price increases.
European prices for LNG rose 50 percent on Monday after state-run Qatar Energy, which transports a fifth of global supplies by waterway, announced it would halt production following a drone attack on Iran.
“Gas will be more affected because the market is still relatively tight and we have lower stocks in Europe at the end of winter; also, there is no replacement for the lost LNG,” Karbau said.
Chronic uncertainty
With US President Donald Trump signaling that he intends to continue attacks on Iran for at least several more weeks, the extent to which Tehran is willing – or able – to close the strait is critical for the global economy.
At least nine commercial ships have been attacked in or near the strait since the start of the conflict, prompting multiple insurers to cancel coverage for ships in the Gulf.
According to ship tracker Marine Traffic, although traffic through the strait has not stopped, it is down about 90 percent compared to normal levels.
“Uncertainty is probably the most dangerous part. Supply chains hate uncertainty,” Schiffling said.
“It’s possible to plan for almost anything, but not knowing what’s going to happen makes it really challenging to adapt operations.”
On Wednesday, Trump said he had ordered the US International Development Finance Corporation to begin insuring shipping lanes in the region to keep trade flowing.
Trump said the US Navy could begin escorting ships through the strait if necessary.
“As long as Israel and the U.S. are able to curb Iranian drone and missile attacks in the Strait, as long as oil tankers move in abundance, and as long as the United States provides back-up insurance for shippers and their cargo, the global economy can fight this war without recession,” Killian said.
“On the other hand, if there is a severe disruption of oil traffic, the economic costs will grow if the disruption is prolonged.”
(tags to translate)Economy
