How the war in the Persian Gulf might spread to the United States Economy
Consumers in the United States may be harmed by rising energy costs, clogged supply chains, and increased government debt. Financial crises, oil price shocks, and pandemics are the three types of occurrences that have historically triggered recessions in the United States. The second situation on that list has already occurred as a result of the American and Israeli attacks on Iran, and if things go badly, the first one could occur as well. The duration and severity of the conflict will have a significant impact.
As strikes have spread beyond Iran, paralyzing airports and causing damage to industrial facilities throughout the Middle East, the impact has grown. Trade flows may quickly return to normal if there is a cease-fire within the next week. But if the bombs keep falling for more weeks or months — as President Trump has foreshadowed — the economic drag could become much heavier and the cost to U.S. taxpayers much greater. The primary channels by which Americans may experience the effects are listed below.
Strangling Oil Supplies
Tankers stopped entering Iran’s control of the Strait of Hormuz, which carries 20% of the world’s oil, in the days following the start of the war. According to Lloyd’s List, about 200 ships are stranded in the Persian Gulf, and oil shipping rates have skyrocketed. Drone attacks forced the closure of Qatar’s largest liquefied natural gas export facility and Saudi Arabia’s largest oil refinery.
Since the fighting began, oil prices have risen dramatically, reaching approximately $80 per barrel. According to AAA, diesel prices averaged more than $4 per gallon, the highest level since April 2024. According to GasBuddy, the price of an average gallon of gasoline has increased from $2.99 this past week to $3.21. Even if the fighting stops, oil prices will remain elevated through the rest of the year, Goldman Sachs estimates, and if the strait remains closed for weeks, they could reach $100 a barrel.
Naturally, this is not the 1970s, when Middle Eastern turmoil caused fuel shortages, which led to skyrocketing inflation and long lines at gas stations. The rise of electricity generated by wind and solar power, as well as the shale boom, have made the United States a net energy exporter, reducing the economy’s reliance on oil. Already, some gas companies in the United States have attempted to profit from higher prices. It is anticipated that inflation will rise, which will make it less likely that the Federal Reserve will reduce interest rates in the coming months.
As is typical, smaller businesses are more susceptible to price swings because they lack the financial resources to invest in long-term contracts or other financial instruments that can safeguard them from them. Chris Hodge, Natixis Corporate & Investment Banking’s chief U.S. economist, stated, “Any kind of industrial business is going to hedge out all their energy exposure.” “That cost of hedging is going to go up a little bit, but it probably won’t stop any plans to spend money on capital.” The same is true for consumers: Those with lower incomes typically spend more on gasoline. People cut back on other things that are important to them as gas prices rise.
There is not much of a cushion left with the personal savings rate at its lowest point in more than three years and credit card and auto loan default rates rising to levels not seen since the Great Recession. Michael Gunther, senior vice president of research at Consumer Edge, a credit card data company, stated that consumers in suburban areas who must drive everywhere and retailers and restaurants that serve low-income customers are most vulnerable.
As it did in 2022 when inflation reached 9%, he anticipates a wider spending gap between high earners and low earners. “That differential really blew out when there was a general inflation shock, and gas prices were also going up a lot then,” Mr. Gunther stated “It’s not like spending went down a cliff, but it sure got worse from before,”
Trade Conflicts
Except for oil, the Strait of Hormuz is not a crucial route. Even though it is now riskier to sail through the entire region, trade has already moved away from the nearby Suez Canal due to the possibility of Houthi rebel attacks over the past few years, limiting the immediate risk. However, if not for the resumption of hostilities, things might have improved. In a note on Wednesday, Capital Economics deputy chief global economist Simon MacAdam wrote, “Rather than prompting a new, disruptive diversion of container shipping, the conflict will mainly postpone plans that shipping companies had to return to the Suez Canal trade route later this year.”
Additionally, as U.S. consumer goods companies purchase raw materials in preparation for the Christmas shopping season, there is uncertainty regarding the war’s potential expansion and the persistence of disruptions. In addition, the tariff landscape was disrupted once more when Mr. Trump rushed to replace duties invalidated by the Supreme Court, the war is clouding importers’ decision making even further.
Overhaul executive vice president David Warrick stated, “We’re in that small window right now where any major impact can have a significant knock-on to the consumer holiday season later in the year.” Overhaul assists clients in managing supply chains.
Risk after risk
It is never a good idea to start a war that will last forever. In this instance, the stock market appears to be overvalued, the economy has become heavily dependent on a single sector, and the United States is already struggling with high debt loads. Deep tax cuts and a lot of spending during the pandemic have kept federal debt as a percentage of GDP at all-time highs, despite a few years of healthy growth and low unemployment.
The costs associated with servicing the borrowed funds have skyrocketed as a result of high interest rates. U.S. investors sold off Treasury bonds instead of gravitating toward them as they typically do during times of global instability after the attacks began. Desmond Lachman, a resident fellow at the American Enterprise Institute, stated, “Foreigners are beginning to doubt whether we are a reliable debtor.” “The last thing you need is a military action that will probably necessitate increased spending on defense,”
In contrast, investments in data centers that support artificial intelligence and the intricate equipment that goes into them—the majority of which is transported from Asia across newly risky and costly trade routes—have contributed significantly to economic expansion.
Stock markets that have become extremely concentrated in the stocks of a small number of technology companies could suffer if investors lose faith in their ability to keep their promises. A sharp downturn could quickly result in layoffs because those enjoying the benefits of the stock boom have been supporting consumer spending for months. “There is a risk that this could trigger a lot of trouble when you put it all together,” Mr. Added Lachman.
