The American economy faces a significant challenge following recent US military action against Iran: the unwelcome prospect of reignited inflation driven by surging oil prices. Experts warn that higher fuel costs for consumers and businesses are a near certainty.
Why Oil Prices Are Reacting
Geopolitical tensions in the Middle East have a swift and direct impact on global energy markets. Following the US strikes on nuclear facilities in Iran, market analysts quickly predicted an immediate spike in oil prices. Experts anticipated a rise of around $5 per barrel when markets reopened, pushing benchmark US oil prices toward the $80 per barrel mark.
This projected increase contrasts sharply with recent trends. For months, US oil prices had largely remained within a $60-$75 range, a period of relative stability that contributed to lower gas prices—often falling below $3 a gallon in many areas—providing welcome relief to consumers battling inflation. The sudden shift marks a potential end to this period of calm.
The Critical Question: How Long Will the Spike Last?
The major uncertainty facing markets and economists is whether this price surge will be sustained. While initial jumps are expected, the long-term trajectory of oil prices hinges largely on Iran’s response and its potential actions regarding the Strait of Hormuz.
This narrow waterway is critically important, accounting for approximately 20% of the world’s total crude oil trade. Blocking or disrupting transit through the Strait would drastically cut global supply, leading to a significant and potentially prolonged price shock.
Iranian officials have indicated they have “a variety of options” for retaliation, and a prominent adviser to Iran’s supreme leader has specifically called for closing the Strait of Hormuz.
Potential Economic Fallout
Experts weigh the risks. While closing the Strait of Hormuz could inflict maximum economic pain on adversaries, including a substantial oil price surge, consulting firm president Bob McNally suggests such a move would risk invoking further military force from the United States and its allies. Iran could also target energy infrastructure in the Persian Gulf.
The impact on consumers could be felt rapidly. According to Patrick De Haan, Vice President of Petroleum Analysis at GasBuddy, changes in oil market prices can show up at the pump surprisingly quickly—sometimes in a matter of hours, often within a few days. Should disruptions affect the Strait of Hormuz significantly, some analysts, like Andy Lipow, project oil prices could potentially reach $100 a barrel, which could translate to gas and diesel prices increasing by about 75 cents per gallon from recent levels.
International Dimensions
The potential closure of the Strait of Hormuz isn’t just an issue for the US. Then-Secretary of State Marco Rubio publicly urged China to pressure Iran against such a move, highlighting China’s heavy reliance on the Strait for its oil imports. He noted that disrupting this route could inflict more damage on other economies than on the United States, which imports a smaller percentage of its oil from the Persian Gulf compared to countries like China.
Economists like Joe Brusuelas also view the potential oil price increase within a broader inflationary context. Combined with factors like trade policies, the geopolitical shock could contribute to inflation moving “faster and higher” in the near term, potentially signaling the end of a period of lower inflation observed earlier in the year, ushering in a more challenging economic environment.
Ultimately, the duration and severity of this “war shock” to the US economy will depend heavily on how geopolitical tensions evolve and whether critical global energy transit routes remain open.
