The world economy is experiencing the most severe oil shock in decades. The worst could still be on the way.
Soaring oil prices continue to impact the global economy due to the war with Iran. Now, some analysts say the worst may yet be to come as the conflict drags on.
The worry is that beyond the immediate impact of rising gasoline prices, the disruptions caused by the war could come in waves – lasting weeks and months and leaving parts of the global economy intact.
“We haven’t seen the bulk of it yet,” said Samantha Gross, director of energy security and climate at the Brookings Institute. “I feel like the markets are underestimating the effect of the war so far. It seems like they’re expecting this war to happen quickly and they’re expecting that we can go back to the old world once it’s over. And I don’t think either of those ideas are true.”
The warning signs are already there. The global benchmark for oil prices, Brent crude — which heavily influences U.S. gasoline prices — briefly topped $119 a barrel last week, the highest level since the start of the war and a level last seen in July 2022 amid the pandemic-era inflation wave. By Monday, Brent prices had stabilized at around $113 per barrel.
Yet even these new highs could quickly be eclipsed if the Middle East conflict remains volatile, analysts say. In other words, current prices still do not reflect the scale of shortages that prolonged conflict portends.
“It is clear to me that if this crisis lasts more than three or four months, it will become a systemic problem for the world,” Patrick Pouyanné, CEO of oil giant Total, said at a global energy conference in Houston earlier this month, according to Bloomberg News.
The most visible chokepoint for Gulf oil supplies remains the Strait of Hormuz, through which 20% of the world’s oil and liquefied natural gas passed before February 28. Maritime traffic through the strait remains limited as Iran continues to exercise tight control over the passage to extract concessions from the United States. From more than 100 ships per day before the conflict, daily traffic across the strait now amounts to less than five ships, according to International data. Monetary fund.
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This left millions of barrels of oil, along with other essential products, landlocked and unable to reach global markets. As global companies begin to deplete their supplies, the cost of sourcing alternative materials could skyrocket.
Even beyond the Strait of Hormuz, key fossil fuel production facilities, including those for liquefied natural gas (LNG), a key energy input, have been hit by retaliatory strikes across the Middle East.
The longer the strait remains shut down and until these facilities are fully restored, the world will face energy shortages that will impact the U.S. economy.
The effect on American drivers has already been significant. Average gasoline prices climbed Sunday to $3.99 per gallon, their highest level since the summer of 2022. Patrick De Haan, chief analyst at Gas Buddy, estimates that, by this week, motorists will have spent $10 billion more on gasoline than pre-war levels. This translates into a drop of about $35 per month in disposable income.
And this is only the direct effect of the increase in prices at the pump for regular motorists. Rising oil prices also translate into overall higher costs across the economy, as expenses for transporting goods, as well as costs for raw materials and packaging, increase. Diesel prices are now just below the record price seen in June 2022.
“Rising oil prices will drive up input, transportation and manufacturing costs at a time when demand remains fragile,” analysts at rating agency Moody’s said in a note published last week.
The United States is less directly affected by the global rise in liquefied natural gas prices thanks to abundant domestic supply, particularly shale. Overall, the U.S. economy is a little more insulated from the current shock than in previous similar episodes, given its domestic energy production capabilities, some analysts say. Additionally, overall dependence on oil is less than in the 1970s thanks to increased efficiency and the economy’s greater reliance on services.
“At this stage, the likely implications of the oil shock for the US economy are more a fear of growth than a looming recession,” analysts at consultancy S&P Global said in a note published last week.
Yet the U.S. economy would not be completely immune to a global economic slowdown triggered by a slowdown in consumption and investment in other parts of the world, caused by rising energy prices in those regions.
“The current macroeconomic environment is a toxic mix of many of the same vulnerabilities that haunted the global economy before past recessions,” Peter Berezin, chief global strategist at BCA Research, said in a note released Sunday evening.
Many analysts now say that due to rising oil prices, the average annual inflation rate in the United States will be around 3%, compared to the Federal Reserve’s 2% target. The new figure would translate to $150 more per month, or $1,800 per 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 – even though, with each passing day, investors are increasingly doubting his ability to control price movements. Yet he also continues to send mixed signals about U.S. intentions: On Sunday night, he said he believed a deal would be reached — only to post on social media on Monday that Iran’s oil facilities would be destroyed if no deal was reached. He has not yet ruled out any military option likely to stabilize markets, including the use of American ground troops to seize Iranian oil infrastructure or the outright requisition of the Strait of Hormuz.
Analysts are now considering scenarios in which the global oil price would reach as much as $200 a barrel in the near term if Iran’s export facilities are damaged by a U.S. escalation, according to Reuters.
Aside from this worst-case scenario, global energy supplies have suffered unspecified damage that is only beginning to be felt, analysts say. Barring a significant change involving the United States’ ability to directly control oil flows in the region, the price of oil would likely have increased indefinitely.
“Even if the conflict ends tomorrow, the supply disruption is going to last for some time, given the damage we’ve seen to energy infrastructure that needs to be repaired,” said Andy Lipow, president of consultancy Lipow Oil Associates. And even once major production facilities affected by the conflict are back up and running – which could take months – “there will be additional geopolitical risk to doing business in the Middle East, because there is no guarantee that this cannot happen again,” he said.
