By Meg Duff
Rising prices on the back of US-Israel strikes on Iran are adding to the economic pressure facing US consumers despite efforts by US President Donald Trump to paint the war as a success.
On Wednesday, Trump declared, “We won – in the first hour it was over.”
Trump’s declaration comes even as the Strait of Hormuz remains closed, cutting off oil from the Gulf amid warnings from Iran, which continues to strike ships, that oil could reach $200 per barrel.
Oil prices spiked above $100 per barrel on Sunday and again today.
The magnitude of the economic pressure on consumers will depend on how long the war lasts and, crucially, how soon shipping traffic can return to the Gulf.
“If it drags on and especially if it remains at this intensity, prices will be higher, and more volatile for consumers,” said Rachel Ziemba, an adjunct senior fellow at the think tank Center for a New American Security.
“If it ends quickly, and it’s a credible and stable end, then we could see prices fairly quickly normalising”.
If the war lasts more than a few weeks, however, observers say the US economy is more likely to see deepening impacts, like 1970s-style “stagflation” or a recession.
When might we see a recession?
On Thursday, the International Energy Agency said in a report that “the war in the Middle East is creating the largest supply disruption in the history of the global oil market.”
According to Sam Ori, who directs the Energy Policy Institute at the University of Chicago, in the past, when oil prices have reached 4 percent to 5 percent of gross domestic product and stayed elevated, “that’s always triggered a recession.”
The US will not hit that threshold as quickly as it would have in the 1970s, when its economy was more deeply dependent on foreign oil, Ori said, but added he expected a recession if prices remained about $140 a barrel for most of the year.
Alternatively, “the indefinite closure of the Strait of Hormuz would so vastly exceed that number, it would not take a year,” he said.
Ori, who used to run an oil shock war game for US officials, said he would have been “laughed out of the room” if he had proposed a scenario where the strait was closed for six months, because many analysts see it as “too big to fail”.
Ori says that assessment is still likely, but recent developments “are chipping away at that level of certainty”.
The Gulf, which separates the Arabian Peninsula and Iran, provides more than one-fifth of the world’s oil supply via tanker ships through the Strait of Hormuz.
The severity of that threat to the global economy is the “strongest indicator that this is going to get resolved pretty fast, because it’s impossible to fathom what would happen if it didn’t”, Ori said.
He added that the conflict has now entered a phase in which it may be moving out of US control, especially as some countries have turned off the oil wells as they run out of storage.
While those events have now been baked into oil prices, the things that he is on the lookout for include “successful mining of the strait, some kind of structural blockage, or a battlespace development that binds the US into a longer, drawn out conflict”, outcomes that could signal a total loss of the strait for an unknown amount of time and create the “conditions for a complete meltdown”.