Surging oil prices continue to ripple through the global economy because of the war with Iran. Now, some analysts say the worst could still be ahead as the conflict drags on.
The concern is that beyond immediate knock-on effects from rising gasoline prices, the war’s disruption could come in waves — ones that will play out over weeks and months and leave few parts of the global economy untouched.
“We haven’t seen the brunt of it yet,” said Samantha Gross, director of energy security and climate at the Brookings Institute. “I feel like markets are so far underestimating the effect of the war. It seems that they expect this war to go quickly, and they expect that we can go back to the world before when it’s over. And I don’t think either of those ideas is true.”
The warning signs are already here. The global oil price benchmark, Brent crude — which heavily influences U.S. gasoline prices — briefly topped $119 a barrel last week, the highest since the war began and a level last seen in July 2022 amid the pandemic-era inflation wave. As of Monday, Brent prices had settled at about $113 a barrel.
Yet even those new highs could quickly be eclipsed if the conflict in the Middle East remains unsettled, analysts say. In other words, current prices still do not reflect the extent of shortages a prolonged conflict portends.
“It’s clear to me that if this crisis lasts more than three or four months, it becomes a systemic problem for the world,” Patrick Pouyanné, chief executive officer of the oil giant Total, said at a global energy conference in Houston this month, according to Bloomberg News.
The most visible choke point for oil supply from the Persian Gulf continues to be the Strait of Hormuz, through which 20% of the world’s oil and liquefied natural gas transited before Feb. 28. Vessel traffic through the strait remains at a trickle as Iran continues to leverage tight control over the passageway to extract concessions from the U.S. From over 100 vessels per day before the conflict, daily traffic through the strait now totals fewer than five ships, according to data from the International Monetary Fund.
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That has left millions of barrels of oil, as well as other key commodities, landlocked and unable to reach global markets. As global businesses begin to exhaust supplies, the cost of sourcing alternative materials could soar.
Even beyond the Strait of Hormuz, key fossil fuel production facilities, including ones for liquefied natural gas, a critical energy input, have been affected by tit-for-tat strikes across the Middle East.
The longer the strait remains at a standstill, and until those facilities come fully back online, the world will face energy shortages that will have a knock-on effect on the U.S. economy.
The effect on U.S. drivers has already been significant. Average gasoline prices climbed to $3.99 per gallon Sunday, their highest since the summer of 2022. Patrick De Haan, chief analyst at Gas Buddy, estimates that, by sometime this week, motorists will have spent an additional $10 billion on gas compared with prewar levels. That translates to a decline of about$35 a month in disposable income.
And that’s only the direct effect from higher prices at the pump for regular motorists. Higher oil prices also translate to overall higher costs throughout the economy, as the expense of transporting goods, as well as raw materials and packaging costs, climbs. Diesel prices are now just below the record price in June 2022.
“Rising oil prices will push up input, transportation and manufacturing costs at a time when demand remains fragile,” analysts with Moody’s credit ratings agency said in a note published last week.
The U.S. is less directly affected by global liquefied natural gas price increases thanks to ample domestic supplies, most notably shale. In general, the U.S. economy is somewhat more insulated from the current shock compared with previous similar episodes given its domestic energy production capacities, some analysts said. In addition, the overall reliance on oil is lower compared with the 1970s thanks to increased efficiency and the economy’s greater dependence on services.
“At this stage, the appropriate characterization of the likely implications of the oil price shock for the U.S. economy is a growth scare rather than an imminent recession,” analysts with S&P Global consultancy said in a note published last week.
Yet the U.S. economy would not be fully insulated from a global economic slowdown sparked by slower consumption and investment in other parts of the world, sparked by higher energy prices there.
“The current macro environment is a toxic brew of many of the same vulnerabilities that haunted the global economy in the lead-up to past recessions,” Peter Berezin, chief global strategist for BCA Research, said in a note published overnight Sunday.
Many analysts now say that, as a result of rising oil prices, the average annual rate of U.S. inflation will be around 3%, compared with the Federal Reserve’s 2% target. The new figure would translate to an extra $150 a month, or $1,800 a year, for a household with $5,000 in monthly expenses.
President Donald Trump has continued to try to reassure markets that the situation is under control — though with each passing day, investors grow more doubtful of his ability to jawbone price movements. Yet he also continues to send mixed signals about U.S. intentions: On Sunday evening, he said he believed a deal will be reached — only to post on social media Monday that Iranian oil facilities will be obliterated if no deal is reached. He also has yet to foreclose on any military option that could ultimately stabilize markets, including using American ground troops to seize Iranian oil infrastructure or commandeering the Strait of Hormuz outright.
Analysts are considering scenarios in which the global price of oil reaches as much as $200 a barrel in the short term if a U.S. escalation damages Iranian export facilities, according to Reuters.
That worse-case scenario aside, there has been undetermined damage to global energy supplies that has only begun to be felt, analysts say. Barring a material change involving the U.S.’ ability to directly control oil flows in the region, the price of oil is likely to increase indefinitely.
“Even if the conflict ended tomorrow, the supply disruption is going to last for quite some time, given the damage that we’ve seen to energy infrastructure that needs to be repaired,” said Andy Lipow, president of Lipow Oil Associates consultancy. And even once key production facilities affected by the conflict come back online — which could take months — “there will be additional geopolitical risk assessed to doing business in the Middle East, as there’s no guarantee that this couldn’t happen again,” he said.
