The escalating conflict with Iran is sending shockwaves through the global economy, increasing energy and fertilizer prices, threatening food shortages in low-income countries, destabilizing fragile states like Pakistan, and complicating efforts by central banks, including the Federal Reserve, to control inflation.
Strait of Hormuz at the center
A key factor is the Strait of Hormuz, through which roughly one-fifth of the world’s oil flows. The strait was effectively blocked following missile strikes by the United States and Israel on February 28, which killed Iranian leader Ayatollah Ali Khamenei.
“For a long time, the frightening scenario that prevented the U.S. from acting against Iran was the risk that Iranians would close the Strait of Hormuz,” said Maurice Obstfeld, senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund. “Now we are precisely in that scenario.”
Soaring energy prices
With this key shipping route disrupted, oil prices skyrocketed from under $70 per barrel on February 27 to nearly $120 per barrel before stabilizing around $90. Gasoline prices have risen alongside crude. In the U.S., the average price of gasoline jumped from under $3 per gallon to $3.48 in just one week.
Economists warn that a 10% sustained increase in oil prices could raise global inflation by 0.4 percentage points and reduce world economic output by 0.2%, according to Kristalina Georgieva.
Simon Johnson, Nobel Memorial laureate in economics, emphasized the importance of reopening the strait:
“About 20 million barrels of oil pass through it daily. There is no excess capacity anywhere in the world to fill that gap.”
Winners and losers
Energy importers — including most of Europe, South Korea, Taiwan, Japan, India, and China — will bear the brunt of higher prices. Pakistan, heavily dependent on imports for 40% of its energy, faces severe economic strain. Central banks there may have to raise interest rates to curb inflation, despite worsening the cost of living for households.
Meanwhile, oil-producing countries outside the conflict zone, such as Norway, Russia, and Canada, stand to benefit from higher prices without direct military risks.
Food security concerns
The conflict also disrupts fertilizer exports, with up to 30% of global fertilizer shipments — including urea, ammonia, phosphates, and sulfur — passing through the Strait of Hormuz.
“Any country with a large agricultural sector, including the U.S., is vulnerable,” said Obstfeld. “The consequences are especially dire for low-income countries where agricultural productivity is already limited. The added costs could lead to significant food shortages.”
Economic resilience
Despite these shocks, some economists remain cautiously optimistic, citing the global economy’s ability to absorb previous crises, including Russia’s invasion of Ukraine and U.S. tariff policies.
Eswar Prasad, Cornell University trade policy professor, noted: “There is room for optimism that the global economy can withstand the fallout from the war with Iran.”
The bottom line
Global markets face uncertainty over how long the conflict will persist, especially with the emergence of Iran’s new leader, Mojtaba Khamenei, believed to be even more hardline than his father.
“The question is how long this will last. It is hard to imagine Iran backing down now,” said Johnson, also a former IMF chief economist.
Economists warn that the current conflict may create both winners and losers, with energy importers facing rising costs and exporters benefiting, while food and fertilizer shortages threaten vulnerable populations worldwide.
