The war with Iran is doing collateral damage to the world economy.<\/p>\n
The conflict is driving up energy and fertilizer prices; threatening food shortages in poor countries; destabilizing fragile states such as Pakistan; and complicating options for the inflation fighters at central banks like the Federal Reserve.<\/p>\n
Causing much of the pain: the Strait of Hormuz \u2014 through which a fifth of the world\u2019s oil passes \u2014 was effectively shut down after the U.S. and Israel launched missile strikes Feb. 28 that killed Iranian leader Ayatollah Ali Khamenei.<\/p>\n
\u201cFor a long time, the nightmare scenario that deterred the U.S. from even thinking about an attack on Iran and which got them to urge restraint on Israel was that the Iranians would close the Strait of Hormuz,\u201d said Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund. \u201cNow we\u2019re in the nightmare scenario.\u201d<\/p>\n
With a key shipping route cut off, oil prices have surged \u2014 from less than $70 a barrel on Feb. 27 to a peak of nearly $120 early Monday before settling closer to $90. They\u2019ve taken gasoline prices with them. <\/p>\n
According to AAA, the average price of U.S. gasoline has shot up to $3.48 a gallon from just under $3 a week ago. Prices could be felt even more significantly in Asia and Europe, which are more dependent on Middle Eastern oil and gas than the United States.<\/p>\n
In India, restaurants are already warning of possible shutdowns as the government prioritizes gas supplies for households. Thailand has suspended overseas travel for civil servants and urged them to take stairs instead of elevators. The Philippines has introduced a temporary four-day work week for some government agencies, while Vietnam is encouraging people to work from home.<\/p>\n
20 million barrels of oil a day go missing<\/p>\n
Every 10% increase in oil prices \u2014 provided they persist for most of the year \u2014 will push up global inflation by 0.4 percentage points and reduce worldwide economic output by as much as 0.2%, said Kristalina Georgieva, managing director of the International Monetary Fund.<\/p>\n
\u201cThe Strait of Hormuz has to be reopened,\u201d said economist Simon Johnson of the Massachusetts Institute of Technology and recipient of the 2024 Nobel memorial prize in economics. \u201cIt\u2019s 20 million barrels of oil a day going through there. There\u2019s no excess capacity anywhere in the world that can fill that gap.\u201d<\/p>\n
The world economy has shown it can take a punch, absorbing blows from the Russian invasion of Ukraine four years ago and from President Donald Trump\u2019s massive and unpredictable tariffs in 2025.<\/p>\n
Many economists express hope that global commerce can stagger through the latest crisis. <\/p>\n
\u201cThe world economy has shown itself capable of shaking off significant shocks like broad U.S. tariffs, so there is room for optimism that it will prove resilient to the fallout of the war on Iran,\u201d said Eswar Prasad, professor of trade policy at Cornell University.<\/p>\n
Timing is everything<\/p>\n
Especially if oil prices can fall back to the $70-to-$80-a-barrel range, wrote economist Neil Shearing of Capital Economics, \u201cthe world economy may absorb the shock with less disruption than many fear.\u201d<\/p>\n
But a lot of ifs remain.<\/p>\n
\u201cThe question is how long is it going to go on?\u201d said Johnson, also former IMF chief economist. \u201cIt\u2019s hard to see Iran backing down now that it\u2019s announced this new leader\u201d \u2013 Mojtaba Khamanei. The son of the slain ayatollah is believed to be even more of a hardliner than his father.<\/p>\n
Also muddying the outlook for an end to the crisis is uncertainty about what the United States is trying to achieve. \u201cThis is all about President Trump,\u201d Johnson said. \u201cIt\u2019s not clear when he\u2019s going to declare victory.\u201d<\/p>\n
Economic winners and losers<\/p>\n
For now, the war is likely to create economic winners and losers.<\/p>\n
Energy importers \u2014 most of Europe, South Korea, Taiwan, Japan, India and China \u2014 will get clobbered by higher prices, Shearing wrote in a commentary for London\u2019s Chatham House think tank.<\/p>\n
Pakistan finds itself in an especially bleak position. The South Asian country imports 40% of its energy and relies especially heavily on liquified natural gas from Qatar, supplies of which have been cut off by the conflict. Higher energy prices will squeeze Pakistani families and damage their economy.<\/p>\n
Far from cutting interest rates to provide some relief, though, the country\u2019s central bank will probably have to raise them instead, say economists Gareth Leather and Mark Williams of Capital Economics. That is partly because inflation remains uncomfortably high in Pakistan \u2014 and higher energy prices threaten to make it worse.<\/p>\n
But oil-producing countries outside the warzone \u2014 Norway, Russia, Canada \u2014 will benefit from high oil prices without the risk of missile and drone attacks.<\/p>\n
Energy isn\u2019t the only issue. Up to 30% of world fertilizer exports \u2013 including urea, ammonia, phosphates, and sulfur \u2013 pass through the Strait of Hormuz, according to Joseph Glauber of the International Food Policy Research Institute.<\/p>\n
Disruption in the Strait has already cut off fertilizer shipments, raising costs for farmers \u2013 and is likely pushing food prices higher.<\/p>\n
\u201cAny countries with significant agriculture sectors, including the United States, would be vulnerable,\u201d Obstfeld said. \u201cThe effects are going to be most devastating in low-income countries where agricultural productivity may already be challenged. Add this extra cost component and you get the prospect of significant food shortages.\u201d<\/p>\n
Where things stand in the US<\/p>\n
The United States, now a net exporter of energy, should gain slightly overall from higher oil and gas prices. But ordinary families will feel the pain at a time when Americans are already furious about high costs ahead of November\u2019s midterm elections.<\/p>\n
U.S. 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 gasoline prices means an extra $10 a week out their budgets, forcing them to cut back elsewhere. \u201cIf I have to pay more for an essential, then I would reduce a discretionary item,\u201d Mathews said. <\/p>\n
If oil prices remain around $100 a barrel, analysts at Evercore ISI calculated, the resulting higher gasoline prices will wipe out for most Americans the benefits of higher tax refunds this year arising from Trump\u2019s 2025 tax cuts. Only the top 30% would still see a gain.<\/p>\n
A quandary for central banks<\/p>\n
The Iran crisis also puts the world\u2019s central banks in a bind. Higher energy prices feed inflation. But they also hurt the economy. So should central bankers raise rates to curb inflation \u2014 or cut them to give the economy a lift?<\/p>\n
The Fed is already divided between policymakers who think a weak American job market needs help from lower rates and those still worried that inflation remains stuck above the central bank\u2019s 2% target.<\/p>\n
\u201cTheir minds will easily go to the 1970s,\u201d Johnson said, when conflict in the Middle East and an Arab oil embargo sent oil prices rocketing. Central bankers are haunted by the memory that their predecessors \u201cdidn\u2019t get it right in the 1970s. They thought it was a temporary shock. They thought they could accommodate with lower interest rates, and they ended up regretting that because inflation became much higher.\u201d<\/p>\n
Johnson predicted that higher energy prices ignited by the war with Iran are \u201cgoing to massively intensify the debate inside the Fed\u201d and make U.S. rate cuts less likely.<\/p>\n
Wiseman writes for the Associated Press. <\/p>\n","protected":false},"excerpt":{"rendered":"The war with Iran is doing collateral damage to the world economy. The conflict is driving up energy…\n","protected":false},"author":2,"featured_media":18024,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[9232,3510,154,266,9233,9234,102,34,882,650,9235,1219,36,2788,878],"class_list":{"0":"post-18023","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-iran","8":"tag-increase","9":"tag-central-bank","10":"tag-energy","11":"tag-global-economy","12":"tag-global-inflation","13":"tag-high-price","14":"tag-hormuz","15":"tag-iran","16":"tag-oil-price","17":"tag-pakistan","18":"tag-shock","19":"tag-strait","20":"tag-war","21":"tag-world-economy","22":"tag-year"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@iran\/116222971240373384","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/iran\/wp-json\/wp\/v2\/posts\/18023","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/iran\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/iran\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/iran\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/iran\/wp-json\/wp\/v2\/comments?post=18023"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/iran\/wp-json\/wp\/v2\/posts\/18023\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/iran\/wp-json\/wp\/v2\/media\/18024"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/iran\/wp-json\/wp\/v2\/media?parent=18023"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/iran\/wp-json\/wp\/v2\/categories?post=18023"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/iran\/wp-json\/wp\/v2\/tags?post=18023"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}