Dive Brief:
- A sustained blockade of oil shipments through the Strait of Hormuz would slow the U.S. economy at an annualized rate of 2.9 percentage points during the second quarter, according to the Federal Reserve Bank of Dallas.
- Nearly 20% of the global oil supply passes through the strait from the Persian Gulf, making the potential market disruption from the Iran war as much as five times larger than prior oil shocks — from the Yom Kippur War in 1973 through the Persian Gulf War in 1990, Dallas Fed economists said in a report.
- “Even the mere anticipation of a geo-politically driven oil production shortfall may generate a surge in the price of oil and a global economic contraction, regardless of whether the event in question materializes,” the economists said. “The same is true of the realization of an oil supply disruption driven by geopolitical events.”
Dive Insight:
Fed Chair Jerome Powell said Wednesday that it is too early to predict whether fighting in Iran will lead to a sustained surge in the price of oil, fueling inflation, crimping consumer spending and slowing economic growth.
“Nobody can tell us what's going to happen on the ground in the conflict in the Middle East, and how long that lasts,” Chicago Fed President Austan Goolsbee said Monday.
“If they are able to resolve these issues, and there's not a permanent, lasting impact on gasoline and energy prices, that will be a far more favorable outcome, of course, than if this is extended, and if we start to see that drifting into inflation expectations,” he said in a CNBC interview.
“You would see more rising long term interest rates as people are trying to compensate for that,” Goolsbee said.
A halt to oil shipments through the strait during the second quarter that removes close to 20% of global oil supplies from the market during Q2 would push up the average price of West Texas Intermediate crude oil to $98 per barrel.
The resulting shock would reduce global GDP growth at an annualized rate of 2.9% for the quarter, a level similar to the harm to the U.S. economy, according to the Dallas Fed economists.
If the strait is blocked during only Q2, GDP growth would bounce back 2.2 percentage points during Q3, they said, and the aggregate loss in growth from Q4 2025 to Q4 2026 would be just 0.2 percentage point.
Conversely, a halt to oil shipments that lasts three quarters would lop 1.3 percentage points off growth from Q4 2025 to Q4 2026, the economists said.
“The key is, historically, oil shocks have been a stagflationary-direction shock that is making employment worse, while at the same time making inflation worse,” Goolsbee said.
“That's the most uncomfortable thing for a central bank to have to face, because there's no obvious playbook,” he said.
WTI futures fell about 10% on Monday to around $88 per barrel after President Donald Trump said U.S. and Iranian negotiators had made progress resolving the conflict.
Trump ordered a five-day pause on U.S. strikes against Iran’s energy facilities. Iran’s Foreign Ministry denied it was negotiating with the U.S.
“There are factors outside of the model that could cause the oil price increase to be more substantial than our model suggests,” the Dallas Fed economists said.
“For example, dislocations in the oil tanker market and rising insurance rates for oil tankers or shifts in the market expectation of how long the strait will remain closed could shift the oil price path higher, with implications for economic growth,” they said.
