Trump Is Risking a Global Stagflation Crisis With His Iran War
Global energy and fuel prices have increased significantly from their pre-war levels. In the United States, the price of a gallon at the pump has increased by 34 cents since the start of the war – and that’s just for unleaded. Diesel, the primary fuel for trucks that move goods across the country, has grown even faster. In Europe, oil and gas price increases have also risen precipitously, already reaching records set during the initial reaction to Russia’s invasion of Ukraine in 2022. For much of Asia, particularly China and India, the disruptions are bound to cause problems concentrated in fossil fuel-intensive sectors, likely leading to further price hikes as the ripple effects of this war are felt. Increased shipping costs will result in more expensive production. As production costs increase, this will only make goods and services more expensive for the consumer. Everything grown, shipped, or manufactured will suffer the consequences, leading to lasting price increases that will persist beyond the end of the war.
This rise in energy prices will almost certainly lead to backlash and political opposition, both in the United States and abroad. Shortages and exorbitant prices will lead to queues and lower spending. The financial markets will have the task of maintaining their balance sheets without completely stopping the allocation of credit. Debts and interest rates could rise as inflation and financial leverage become too much to bear. Countries will need to ration and actively choose which constituencies deserve more support. Electorally, it will be a disaster for many ruling parties. And as conflict further degrades market stability and refugees flee a deteriorating situation, this potential for disruption will only increase. Friends and clients will indeed begin to react differently when their vested interests are threatened or upset, especially if it is a response to a war deliberately started without a long-term plan.
Trump has tried to allay those concerns by saying, for example, that U.S. air and naval power would protect oil and natural gas shipments passing through the Strait of Hormuz, while U.S. funds could cover marine insurance costs for ships in the region. However, that would put the United States on the hook for a market on fire, now estimated at $350 billion. It is not certain that the United States will be able to sustainably cover these costs, even in the short term. The administration also announced plans for Treasury Department response, monetary policy efforts, and exploitation of our oil reserves. But as energy production faces an existential crisis, these efforts have yet to assuage markets and their growing fears.
