Is the U.S. economy facing major disruption or a minor challenge from oil supply shocks? Economists differ on how fuel shortages may impact growth and inflation.

Iran Says the Strait of Hormuz Will Stay Closed. What Happens to the US Economy Next?

Key Takeaways

The U.S. fuel supply could be headed for a reckoning as the Iran conflict continues to disrupt energy supplies.
Some analysts believe the shortfall will wreak havoc, while others are counting on the U.S. economy adapting relatively painlessly to the new conditions.

The Iran war’s disruptions to crude oil supplies are about to cause major problems—or maybe the U.S. economy can pretty much shrug it off. With the global energy market entering uncharted territory, the answer depends on whom you ask.

A pair of analyses released on Friday reached opposite conclusions about the risk the U.S. economy faces from the ongoing closure of the Strait of Hormuz. The crucial waterway between Iran and Oman is the route through which 20% of the world’s oil supply usually flows to global markets from the Persian Gulf.

This question became even more salient on Monday after Iranian officials said they had withdrawn from peace negotiations and vowed to “completely block” the strait, according to Iranian state media and reported by CNBC. 1The news jolted oil prices up 7% on Monday morning.

Forecasters at Goldman Sachs said the U.S. economy would be relatively unscathed even if the strait never reopens.2 Meanwhile, HFI Research, a self-described “contrarian” investment research firm, said energy markets were about to hit a wall and risked gasoline shortages in the coming months.3

The contrasting forecasts represented the extremes of possible outcomes as the Iran conflict entered its fourth month, prolonging what the International Energy Agency called the “largest supply disruption in the history of the global oil market.”

What This Means For The Economy

The trajectory of the U.S. economy could depend on whether oil resumes flowing through the Strait of Hormuz, and how well it can adapt if that never happens.

The effects so far have been significant, but not catastrophic for the U.S.

Crude oil was trading at $97 a barrel on Monday, according to the Brent international benchmark. That was below its recent high of $118 at the height of hostilities in March, but well above its prewar level of around $70.

Soaring oil prices have pushed the average price of gasoline in the U.S. to $4.32 a gallon, up from $2.98 before the shooting began, according to AAA. Gas prices, in turn, are stretching household budgets and pushing up inflation across the economy.

So far, prices have been kept in check by periodic infusions of optimism in financial markets that the two sides will reach an agreement to reopen the strait and resume commercial traffic.

In the pessimistic scenario, that optimism could lead to shortages or steeper price hikes down the road because people haven’t cut back much on energy use.

In HFI’s analysis, oil stockpiles have been so depleted that energy markets are essentially operating without the buffer they usually rely on to smooth over routine disruptions. That means something like a refinery outage or a hurricane could have a much more serious impact than usual.

The firm compared the situation to a household living “paycheck to paycheck” and unable to cope with an unexpected expense.

“Now that we are a month and a half past the oil market breaking point, we are just going to hit the wall,” the company wrote in an unsigned Substack post. “There’s no other way around it.”

In the optimistic scenario, the U.S. will be able to muddle through even if the strait never reopens.

Megan Peters, an economist at Goldman Sachs, calculated the economic impact on the U.S. and global economies in the event of a prolonged closure of the strait. The U.S. GDP growth would be dragged down by less than 0.5 percentage points a year from the oil shock, while the disruption of non-oil commodities, including fertilizer and aluminum, would be about half of that.

By comparison, the U.S. economy grew at an annualized rate of 1.6% in the first quarter, so the hit would not be enough to send the GDP into negative territory. Other countries more dependent on oil from the Middle East would be harder hit.

“The U.S. will remain relatively insulated from supply disruptions due to its limited dependence on Middle East exports and its ability to outbid poorer economies,” Peters wrote.

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Peters is counting on companies and individuals to find workarounds to make up for the reduced oil supply, such as using substitutes for petroleum-based plastics.

“Basic plastics such as polyethylene can be replaced by paper, glass or aluminum packaging,” she wrote. “Some more innovative solutions include supermarkets in Asia wrapping produce with banana leaves, and cosmetics brands switching from traditional liquid shampoos to solid versions packaged in cardboard. The loss of plastics could accelerate the rollout of such measures while leaving GDP little changed.”

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