The conflict in Iran has ignited a worldwide energy crisis that has roiled markets and pushed oil prices to their highest level in four years. As the war intensifies, prospects for a swift resolution are fading—along with hopes that the U.S. economy could emerge unharmed.
The war has effectively blocked the Strait of Hormuz, a critical energy corridor connecting Persian Gulf oil and gas producers to the rest of the world. According to the International Energy Agency (IEA), this closure has cut off the roughly 20 million barrels of oil that normally flow through the strait daily. The IEA estimates the conflict is removing about eight million barrels per day from global supply, making this the largest oil supply disruption in history. As a result, oil prices have been volatile: Brent crude, an international benchmark that cost around $70 a barrel pre-war, neared $120 last week and has since stabilized between $90 and $100.
These price swings have already raised gasoline costs for U.S. drivers, but they may not be enough to trigger the severe downturn some economists warned of. Current price levels are likely to have only a marginal long-term impact on economic output, per a Friday report from advisory firm Oxford Economics.
However, this mild impact depends on oil prices returning to pre-war levels relatively quickly in the coming months. The longer the strait stays closed and prices rise, the faster the global economic situation—including in the U.S.—worsens.
Fracturing segments of the economy
Oxford Economics uses a standard rule of thumb to estimate pricier oil’s economic impact: For every $10 sustained increase (defined as around two months), GDP drops by 0.1% due to higher inflation and slower growth. If prices average $100 for two months, it would erase a few tenths of a percentage point from global GDP growth but likely avoid a recession, the report says.
Oxford Economics found the economy’s breaking point is oil prices averaging $140 a barrel for two months. At that level, spillover effects would be far harder to contain, and many global regions would teeter on the edge of economic decline.
“There are mild contractions in the Eurozone, the UK, and Japan, while the U.S. nears a temporary standstill and layoffs push up the unemployment rate, leaving it close to a recession,” the report’s authors wrote.
A key challenge in calculating higher oil prices’ economic consequences is their exponential implications: The more prices rise, the more knock-on effects can harm the economy. Prolonged high oil and transportation costs would spill over into food and other goods, turning inflation into a widespread issue instead of one focused mainly on fuel and energy. The Federal Reserve and other central banks would also be more likely to tighten interest rate policies if oil prices stay high, dampening economic activity.
The final complication is psychological: Sustained high oil prices could lead to a “deterioration in the collective psyche,” per the report, as consumers’ expectations of high prices become fixed. In car-dependent America—where drivers closely track gas prices—fuel inflation would risk squeezing household disposable income and reducing spending elsewhere, further slowing the economy.
Unpredictable outcomes
Under this worst-case scenario, Oxford Economics’ modeling suggests U.S. inflation would peak at around 5% in Q2 2026, up from the current 2.4%—the highest since March 2023. Such figures would likely push the Federal Reserve to adopt a more hawkish stance, potentially favoring rate hikes this year. While the Fed is expected to hold rates steady this week, the Iran conflict has led many forecasters to expect no cuts at all in 2024.
Though the $140 scenario is a serious warning, Oxford Economics notes its odds remain low for now. A more plausible scenario, per the authors, is oil prices averaging $100 a barrel—consistent with recent weeks’ levels. Much depends on when the conflict ends and the strait is safe to navigate again, allowing Gulf oil and gas exports to resume. Trump administration officials recently said several more weeks could pass before hostilities subside.
Oil prices moderated Monday after U.S. announcements signaling supply boosts: temporary loosening of Russian oil sanctions, permission for Iranian tankers to leave the Gulf, and President Donald Trump’s pleas for other countries to help secure the strait. The IEA-coordinated release of 400 million barrels from global emergency reserves also helped reassure markets with a limited buffer.
But oil prices have grown accustomed to swings during this war. Early in the conflict’s second week, after Trump posted on Truth Social that higher oil prices were a “small price to pay” for U.S. goals in Iran, prices jumped 25% overnight to just below $120 a barrel before retreating later that week.