Iran, Mar 10 : The war with Iran is delivering a severe jolt to the global economy, with the closure of the Strait of Hormuz a critical shipping lane for nearly a fifth of the world’s oil triggering sharp spikes in energy prices. The strait was blocked following US and Israeli missile strikes on February 28 that killed Iranian leader Ayatollah Ali Khamenei.
Maurice Obstfeld, senior fellow at the Peterson Institute for International Economics, described the scenario as “the nightmare that deterrence previously prevented.” Oil prices surged from under $70 a barrel before the conflict to nearly $120 early Monday, later stabilizing around $90. In the United States, the average gasoline price jumped to $3.48 per gallon from just under $3 a week earlier, while Asia and Europe, heavily reliant on Middle Eastern oil, face even greater price pressures.
According to IMF Managing Director Kristalina Georgieva, a persistent 10% rise in oil costs could push global inflation up by 0.4 percentage points and reduce worldwide economic output by 0.2%. Economists warn that reopening the Strait of Hormuz is critical, as no other route or reserve capacity can offset the 20 million barrels of daily oil that transit it.
Energy-importing nations, including India, China, Japan, South Korea, and most of Europe, are expected to face higher costs, while oil-producing countries such as Norway, Russia, and Canada may benefit from elevated prices. Pakistan, heavily dependent on imported energy and liquefied natural gas, faces an especially precarious situation, with higher prices threatening both households and economic growth.
The war is also impacting agriculture. About 30% of global fertiliser exports pass through the strait, including urea, ammonia, and phosphates. Supply disruptions are driving up costs, potentially raising food prices and creating challenges for farmers worldwide. Low-income countries with fragile agricultural systems are at greatest risk of shortages.
US households are already feeling the pinch, paying an estimated $2,500 annually for fuel, according to Mark Mathews of the National Retail Federation. Analysts warn that high gasoline prices could offset gains from the 2025 tax cuts for most Americans.
Central banks are facing a dilemma. Rising energy costs feed inflation, but aggressive rate hikes could harm the economy. The Federal Reserve, divided between easing to support jobs and tightening to curb inflation, may see intensified debates reminiscent of the 1970s oil shocks. Economists caution that missteps in policy could exacerbate global inflationary pressures.
While some analysts remain cautiously optimistic that global commerce can absorb the shock as it did during previous crises like the Ukraine war and US tariffs — the duration and escalation of the Iran conflict will largely determine the long-term economic fallout.