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By Hugh Cameron
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As U.S.-Israeli strikes on Iran and Tehran's multidirectional retaliation roil the world's energy markets, economists are warning that the fallout of a sustained period of turmoil could trigger another oil-related inflationary spiral.
Crude oil futures have risen sharply following the attacks that killed Iran's Supreme Leader Ayatollah Ali Khamenei, spiking over 7 percent in early trades on Monday, and analysts at Wood Mackenzie have said prices could reach over $100 per barrel if tanker traffic through the strait of Hormuz does not swiftly return to normal. Those at Capital Economics predicted that, depending on the length of the resulting conflict, disruptions to global supplies could have "a material effect on global inflation."
"There is no economic upside to any of this, as the higher oil prices will weigh on growth and push inflation higher," Mark Zandi, the chief economist at Moody's Analytics, told Newsweek. "This will, in turn, heighten Americans' affordability concerns and complicate the conduct of monetary policy, as the Fed will be unsure whether to respond to the weaker growth by lowering rates or to the higher inflation by raising rates."
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Why It Matters
In addition to the myriad geopolitical implications, the fallout from the strikes risks ushering in a period of destabilization for trade and the world economy. Markets were down at the week's open, reflecting these fears and anxiety over Iran's ongoing retaliatory moves—from region-wide missile attacks to constricting shipments through the vital Hormuz strait.
As seen following Russia's invasion of Ukraine in early 2022, disruptions to oil and natural gas flows ripple through the entire economy, raising gas prices, businesses' operating costs and household budgets.
What To Know
Brent crude prices, the international benchmark, briefly rose above $80 per barrel in the wake of Khamenei's death, and are trading around $78 as of Monday morning.
According to Allianz Global Investors, this spike—and associated "energy-driven inflation impulses"—could "complicate the monetary policy outlook," given that a 5 to 10 percent increase in the price of oil "typically adds 0.1–0.3 percentage points to headline inflation in the U.S. and Europe almost immediately."
Meanwhile, analysts at Ebury warn that a "sharp and sustained move higher in global oil prices would have broad implications for the global economy, as this could lead to higher inflation expectations and a hawkish pivot among central bankers."
"Oil markets are highly sensitive to geopolitical risk in the Gulf," said Arielle Ingrassia, an associate director and investment specialist at the U.K. wealth management firm Evelyn Partners.
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"Iran is a significant exporter, and around a fifth of global oil supply passes through the Strait of Hormuz," she told Newsweek. "While the Strait remains open, even the threat of disruption can push up shipping insurance costs, deter tanker traffic and create delays, tightening supply conditions at the margin."
Several shipping firms, including the logistics giant Maersk, are already steering clear of the passage after Iran's Revolutionary Guards said on Saturday that maritime traffic was prohibited.
"The safety of our crews, vessels and customers' cargo remains our key priority," Maersk said in an online advisory on Sunday. "We are suspending all vessel crossings in the Strait of Hormuz until further notice."
Depending on the length of the hostilities, a sustained increase in energy prices could develop into a more comprehensive drag on the global economy.
"There could be secondary and tertiary impacts," the managing director of the International Monetary Fund (IMF) told Bloomberg in June. "Let's say there is more turbulence that goes into hitting growth prospects in large economies—then you have a trigger impact of downward revisions in prospects for global growth."
What People Are Saying
Analysts at the asset management firm DWS wrote in a note published on Monday: "For the oil price it matters most whether the strike leads to a prolonged disruption to supply or just a short-term shock. Venezuela and the strike on Iran last year were both short-term shocks and the effect on the oil price faded fairly quickly. With regards to the current strike, two fundamental factors can influence oil supply and, consequently, oil prices. First, the impact on Iranian supply and, second, any disruption to trade in the Strait of Hormuz."
Mark Zandi, the chief economist at Moody's Analytics, told Newsweek on Monday morning: "The military conflict with Iran is devastating for everyone involved, but the economic fallout has been limited, at least so far. Global oil prices are up about $5 per barrel, and U.S. stock prices are down about 1 percent in immediate reaction."
What Happens Next
Economists agree that the economic fallout and any inflationary effects will depend on how sustained the conflict proves to be.
"If the increase in oil prices is held to $5 per barrel and isn’t sustained, the economic consequences will be negative, but small," Zandi said on Monday. "Let's hope the conflict resolves quickly."
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