U.S. and Israeli military actions against Iran have shaken the global economy. Prices are rising, stock markets are unstable, and many developing nations are struggling with fuel shortages.
Recent attacks on oil infrastructure in the Persian Gulf, including refineries and pipelines, threaten to worsen the situation for months or even years. Christopher Knittel, an energy economist at MIT, stated, “The destruction of infrastructure means long-term ramifications.” For example, Iran’s strike on Qatar’s Ras Laffan natural gas terminal has severely limited global liquefied natural gas (LNG) supplies, cutting Qatar’s export capacity by 17% and delaying repairs for up to five years.
Since the conflict began, oil prices have surged. Brent crude now costs around $105 a barrel, up from about $70 just before the conflict. Knittel warns that such price surges often lead to global recessions. Historical oil shocks, like the ones in the 1970s, caused significant economic downturns, making today’s market especially fragile.
The current crisis is reminiscent of those past events. According to Carmen Reinhart, from Harvard, we’re seeing a potential return to stagflation—high inflation combined with stagnant growth. Gita Gopinath, the former chief economist at the IMF, estimates that global economic growth could be 0.3 to 0.4 percentage points lower due to rising oil prices.
Fertilizer prices are also affected. The Gulf is a major exporter of essential fertilizers. Urea prices have jumped 50%, and ammonia is up 20%. Brazil, which relies on imports for 85% of its fertilizer, is particularly at risk. As farmers struggle with rising costs, food prices are likely to increase, impacting families, especially in poorer nations.
The crisis is affecting energy consumption globally. Poorer nations are hit the hardest, unable to compete for dwindling oil supplies. Lutz Kilian from the Federal Reserve Bank of Dallas noted that these countries might increasingly face energy shortages. The situation in Asia is particularly concerning since over 80% of oil and LNG passing through the Strait of Hormuz heads there.
In the Philippines and Thailand, government offices are implementing energy-saving measures. India is prioritizing household energy needs over businesses, but some restaurants are reducing operating hours or changing their menus due to LPG shortages. South Korea has reinstated fuel price caps and limited vehicle usage by government employees.
The U.S. economy remains somewhat insulated, being a major oil exporter. Yet, high gasoline prices are squeezing American consumers. The average cost of gasoline has risen to nearly $4 a gallon, up from $2.98 just a month ago. Mark Zandi of Moody’s Analytics highlights that rising fuel costs weigh heavily on consumer sentiment.
Despite these challenges, signs of weakness in the U.S. economy are evident. Growth fell to an annual pace of just 0.7% during late 2022, and job cuts have raised recession forecasts to 40%, according to EY-Parthenon’s Gregory Daco.
Recovery will not be easy. The world economy has had to navigate challenges before, but ongoing hostilities in the Gulf region cast doubt on its resilience. As Kilian explained, repairs to LNG facilities and other critical infrastructure in the region could take years. The broader question now remains: how long will this conflict last, and what damage will it inflict on the global economy?
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