Iran war shakes global economy as Strait of Hormuz closes

By Ahmet Taş | Wise News Press

TEHRAN, IRAN — The de facto closure of the Strait of Hormuz following US and Israeli missile strikes on Iran has pushed global oil prices to $120, disrupting supply chains and threatening the stability of the global economy.

With roughly one-fifth of the world's oil trade passing through the strait, the blockade is not only driving up energy costs but also escalating risks to global food security and forcing central banks into a complex interest rate dilemma.

Former International Monetary Fund (IMF) chief economist Maurice Obstfeld stated that the US has long avoided attacking Iran precisely because of this outcome, noting, "The nightmare scenario that has long deterred the US and prompted calls for Israeli restraint was Iran closing the Strait of Hormuz. We are now exactly in that nightmare scenario."

Severe fluctuations in oil prices

The disruption at one of the global energy market's most critical transit points caused crude oil, which was trading under $70 a barrel in February, to briefly spike to $120 on Monday. Although prices later settled around the $90 mark, the surge in fuel costs is already reaching consumers. In the US, the average price of gasoline rose from $3 to $3.48 per gallon within a week, while experts anticipate the shock will be felt even more intensely in Europe and Asia, which rely heavily on Middle Eastern energy imports.

Simon Johnson, MIT economist and 2024 Nobel laureate, emphasized that approximately 20 million barrels of oil pass through the strait daily, warning that the world lacks the spare production capacity to cover this massive deficit.

Global inflation and food supply risks

The crisis extends beyond energy markets, posing a severe threat to agricultural supply chains. According to the International Food Policy Research Institute, about 30% of global fertilizer trade—including urea, ammonia, and phosphate—routes through the Strait of Hormuz. IMF Managing Director Kristalina Georgieva indicated that if energy and fertilizer costs remain elevated, every 10% increase in oil prices could boost global inflation by 0.4% and reduce global economic growth by up to 0.2% for the year.

Experts warn that low-income countries with limited agricultural capacity will bear the brunt of this shock, as rising production costs could trigger severe food shortages.

Central banks face interest rate dilemma

The surge in energy prices places institutions like the US Federal Reserve (Fed) and the European Central Bank (ECB) in a tight spot between curbing inflation and preventing an economic downturn. Johnson noted that this situation echoes the 1970s Arab oil embargo, adding that rising energy prices will complicate ongoing discussions within the Fed regarding potential interest rate cuts to support a weakening labor market.

War's duration will determine the outcome

Eswar Prasad, a trade policy professor at Cornell University, suggested that the global economy has withstood severe shocks in the past and could recover if oil prices return to the $70–$80 range. However, the hardline political stance of Iran's new Supreme Leader Mojtaba Khamenei, combined with the ambiguity of US objectives, sustains deep uncertainty over when the crisis might be resolved.

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