The war between Israel and Iran has dramatically escalated in the last several weeks. This troubling escalation increases fears of a wider conflict, perhaps even a war. Such a conflict would be disastrous for the US economy, even as the country is now energy independent, warn the economists. Next year, gas prices are almost certain to go up. As this geopolitical tension risks sending shockwaves through a range of sectors, further destabilizing our already fragile economic landscape.
James Knightley, chief international economist at ING, warns that if the conflict escalates then an oil shock is likely. He points out that the US is less dependent on foreign oil than we were in other decades. Even so, any new eruption of conflict in the Middle East would have considerable consequences for domestic affairs. Knightley expects gas prices to “shoot through the roof” if tensions keep escalating.
Geopolitical Tensions and Economic Implications
Washington’s timidity over the Strait of Hormuz, a vital waterway through which a fifth of all oil traded globally passes, looms large in this debate. In 2023 approximately 20 million barrels of oil transited this strait daily. This remarkable slab accounted for nearly 1/5 of global petroleum liquids consumption. Experts warn that Iran could retaliate against Israel by closing this strategic passage, leading to severe disruptions in oil supply.
“One of the most direct impacts on US consumers would be if the Strait of Hormuz was closed, leading to a spike in energy costs as the flow of seaborne oil and gas becomes disrupted.” – James Knightley
In the past, that kind of upheaval in the Middle East has sent energy prices soaring. The Iranian Revolution and the Arab oil embargo following the Yom Kippur War exemplify geopolitical conflicts’ effects on gas prices. Each of those events caused dramatic increases in fuel prices. US Federal Chair Jerome Powell is quite sure that the present economic fallout will be different than… Even as optimism grows, many economists are understandably remaining cautious.
Powell stated, “Those things don’t generally tend to have lasting effects on inflation, although, of course, in the 1970s they famously did because you had a series of very, very large shocks.” So yes, energy prices go up when there’s conflict, but if you wait a little while, it levels out.
Current Economic Landscape and Future Risks
Even with Powell’s alacrities, some analysts are worried about the wider impacts of the Israel-Iran war on US economic prospects. JPMorgan economists noted, “The US and global economies are set to absorb multiple shocks this year,” indicating that current economic pressures may compound any effects from rising energy prices.
Knightley goes on to explain what the effects of dramatically raising gasoline prices would be for the average consumer. He warns that “with tariff-induced price hikes already set to squeeze household spending power, higher gasoline prices would intensify the strain on consumer pockets, risking a more pronounced slowdown in the economy.”
The US Energy Information Administration recently underscored oil transport challenges in the event the Strait of Hormuz were blocked. They note that “very few alternative options exist to move oil out of the strait if it is closed.” This already energized scarcity often means less supply when demand is high, increasing prices and further distorting an already complicated energy market.
Navigating Uncertainty
As more threats are traded between Israel and Iran, the fragility of the global economic situation is reasserted. If Powell’s remarks are any indication, he has confidence in the US economy’s ability to weather these challenges. History teaches us that we should proceed with extreme caution. Other disruptions in oil supply chains will inevitably trigger heat inflation. This would have major consequences on consumers and businesses alike.
“What’s tended to happen is when there’s turmoil in the Middle East, you may see a spike in energy prices, but it tends to come down.” – Jerome Powell