While Donald Trump led trade wars, attacked American institutions, and threatened allies over the past year, the global economy showed surprising resilience. Inflation was falling, and European markets were hitting records. Now, as the American and Israeli attack on Iran has escalated into a broader regional conflict, that picture may change. Whether and how much will depend on one single question: is the Strait of Hormuz open.
– “Oil is a critical channel,” said Neil Shearing, chief economist at Capital Economics, to the Financial Times.
Edward Fishman, a senior fellow at the Council on Foreign Relations and author of a book on American economic warfare, describes two possible scenarios. In the first, there is a ‘significant and prolonged disruption of all traffic through the Strait of Hormuz, which is the most important maritime chokepoint in the world.’ Since every fifth barrel of oil in the world passes through the strait, its closure would, according to Fishman, mean ‘a huge shock to global oil prices’ and would push prices above $100 per barrel. Brent is already close to a seven-month peak of $73, after a rise of nearly 12 percent in the last month.
A more likely and less devastating scenario, claims Fishman, is that the strait does not close completely, but that Iranian oil exports are halted. In that case, a more realistic jump is to at least $80 per barrel. OPEC announced on Sunday an increase in production of 206,000 barrels per day in April, but that is less than many expected.
For the American economy, a spike in oil prices is not insignificant, although the U.S. today imports only 17 percent of its energy needs, the smallest share in forty years. ‘A sudden rise in global oil prices can hurt American consumers and companies,’ warned James Knightley, an American economist at ING.
Oil at $100 per barrel could push inflation from the current 2.4 percent to over four percent, according to Knightley’s estimates, which would significantly complicate the Federal Reserve’s planned interest rate cuts.
Ajay Rajadhyaksha from Barclays offers a more concrete calculation.
– ‘Any sustainable increase in oil prices of $10 per barrel can reduce economic growth by 10 to 20 basis points over the next 12 months. If oil were to reach, say, $120 and stay there, the American and global economy would suffer a significant blow,’ he explains.
Barclays also predicts a strengthening of the dollar with every rise in oil prices, estimating an increase of 0.5 to one percent against a basket of global currencies for every ten percent increase in oil prices.
Asia would be hit hard as China, India, Japan, and South Korea are key destinations for oil and liquefied natural gas that pass through the strait. According to data from the U.S. Energy Information Administration, as much as 84 percent of crude oil and condensate and 83 percent of liquefied natural gas that passed through the strait in 2024 were destined for Asian markets. Capital Economics estimates that Brent at $100 would add between 0.6 and 0.7 percent to global inflation.
Europe would feel pressure both through oil prices and through liquefied natural gas prices. The European Central Bank, however, has somewhat more maneuvering space as inflation in the eurozone is at 1.7 percent, below target. The Bank of England, however, faces a more sensitive situation.
– ‘Given how balanced the voting is, I think this could make it a bit harder to make progress on interest rate cuts until we get more clarity on the scale of the initial response to oil prices and how long it might last,’ said Hetal Mehta, chief economist at St James’s Place.
The conflict comes at an already nervous time. Shares of American banks experienced their largest drop since Trump’s tariff shock in April on Friday, and the technology sector is down more than three percent in February. Tomasz Wieladek, chief European economist at T Rowe Price, warns of the cumulative effect.
– ‘Too many shocks are happening at once. Venezuela, Greenland, tariffs, and now Iran, all within two months,’ he says.
Still, some analysts remain relatively calm.
– ‘Despite all the recent geopolitical events, the level of growth in the global economy and trade has been incredibly resilient,’ said Innes McFee, chief economist at Oxford Economics.
