WASHINGTON (AP) — war with iran It is causing collateral damage to the global economy.
Conflict has caused energy and fertilizer prices to soar. The threat of food shortages in poor countries. destabilizing fragile states such as Pakistan; And the options for central bank inflation fighters like the Federal Reserve are becoming more complex.
Caused a lot of pain: Iran shut down state institutions Strait of Hormuz A fifth of the world’s oil passes through it after the US and Israel launched a deadly missile attack on February 28th. Iranian leader Ayatollah Khamenei.
“For a long time, the nightmare scenario that would have deterred the United States from even considering attacking Iran, and which would have urged restraint from Israel, was that Iran would close the Strait of Hormuz. Now we’re in the nightmare scenario,” said Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund.
Important transportation routes have been cut off, crude oil price Prices rose from less than $70 per barrel on February 27 to a peak of nearly $120 early Monday, before settling near $90. They took gas prices with them.
The average price of gasoline in the U.S. rose to $3.48 a gallon, up from just under $3 a week ago, according to AAA. The price impact could be even greater in Asia and Europe, which are more dependent on oil and gas from the Middle East than the United States.
20 million barrels of oil go missing per day
Kristalina Georgieva, managing director of the International Monetary Fund, said that every 10% increase in oil prices (as long as it persists for most of the year) would push up global inflation by 0.4 percentage points and reduce global economic output by up to 0.2%.
“The Strait of Hormuz needs to be reopened. There’s 20 million barrels of oil flowing through it a day. The Strait of Hormuz needs to be reopened,” said Simon Johnson, an economist at the Massachusetts Institute of Technology and winner of the 2024 Nobel Memorial Prize in Economics. There is no excess production capacity anywhere in the world that can fill that gap. ”
The global economy has shown it can withstand punches, absorbing blows from Russia’s invasion of Ukraine four years ago and President Donald Trump’s massive policies. unpredictable tariffs In 2025.
Many economists have expressed hope that global commerce can weather the latest crisis.
“There is room for optimism that the global economy will prove resilient to the fallout from a war with Iran, as it has been shown to be able to avoid significant shocks such as widespread U.S. tariffs,” said Eswar Prasad, a trade policy professor at Cornell University.
timing is everything
Capital Economics economist Neil Shearing wrote that “the global economy could absorb the shock with less disruption than many fear,” especially if oil prices can fall to the $70 to $80 per barrel range.
But many ifs remain.
“The question is how long this situation will last,” said Johnson, a former IMF chief economist. “Now that they have announced a new leader, it is hard to see Iran backing down.” Mojtaba Hamanei. The slain Ayatollah’s son is believed to be even more hardline than his father.
Uncertainty about what the United States is trying to accomplish also clouds prospects for an end to the crisis. “This is all about President Trump,” Johnson said. “It’s not clear when he will declare victory.”
economic winners and losers
For now, the war is likely to produce economic winners and losers.
Energy importing countries – most of Europe, South Korea, Taiwan, Japan, India And China will be crushed by rising prices, Shearing said in a commentary for London think tank Chatham House.
Pakistan is in a particularly difficult position. The South Asian nation imports 40% of its energy and is particularly dependent on liquefied natural gas from Qatar, whose supplies have been disrupted by conflict. Rising energy prices will put pressure on Pakistani households and damage the economy.
But Capital Economics economists Gareth Leather and Mark Williams say the country’s central bank will likely need to raise interest rates rather than lower them as some kind of relief. Part of the reason is that Pakistan’s inflation rate remains uncomfortably high, and rising energy prices threaten to make the situation worse.
However, Norway, an oil-producing country outside the war zone, RussiaCanada — will benefit from high oil prices without risking missile or drone attacks.
Energy is not the only issue. Up to 30% of global fertilizer exports, including urea, ammonia, phosphates and sulfur, pass through the Strait of Hormuz, according to Joseph Glauber of the International Food Policy Research Institute.
Disruptions in the Channel have already disrupted fertilizer shipments, raising costs for farmers and likely increasing food prices.
“Any country with a significant agricultural sector, including the United States, will be vulnerable,” Obstfeld said. “The impact will be most devastating in low-income countries, where agricultural productivity may already be challenged.” Adding this additional cost element can result in severe food shortages. ”
Current situation in the United States
The United States is currently a net exporter of energy and should benefit slightly overall from higher oil and gas prices. However, the average family will feel pain when: Americans are already furious Regarding the high costs ahead of the midterm elections in November.
American households pay $2,500 a year, or nearly $50 a week, to fill up their car, said Mark Matthews, chief economist at the National Retail Federation. A 20% increase in gas prices would add $10 a week to your budget, forcing you to make cuts in other areas. “If you have to pay more for essentials, you’re going to cut back on discretionary items,” Matthews said.
Analysts at Evercore ISI estimate that if oil prices remain around $100 a barrel, the resulting rise in gasoline prices will wipe out the benefit of increased tax refunds this year from President Trump’s 2025 tax cuts for most Americans. Still, only the top 30% benefit.
Trouble for central banks
The Iranian crisis has also pushed the world’s central banks into a predicament. Rising energy prices drive inflation. But they also have a negative impact on the economy. So should central bankers raise interest rates to control inflation, or lower them to boost the economy?
The Fed is already divided between policymakers who believe the weak U.S. job market needs support through lower interest rates and those who remain concerned that inflation remains above the central bank’s 2% target.
“Their minds could easily go back to the 1970s,” Johnson said at a time when oil prices were soaring due to Middle East conflicts and the Arab oil embargo. They thought it was a temporary shock. They thought they could get away with lower interest rates, but ended up regretting it as inflation rose even higher. ”
Johnson predicted that high energy prices caused by the war with Iran would “significantly intensify the debate within the Fed” and make a U.S. interest rate cut less likely.
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AP Retail Writer Anne D’Innocenzio in New York and AP Economic Writer Christopher Lugabar in Washington contributed to this report.
