The biggest story in the world right now isn’t inflation or policy changes. It’s a narrow, 21-mile-wide waterway between Iran and Oman that carries about a fifth of the world’s oil supply. Since late February, the Strait of Hormuz has been at the center of a military and economic crisis that is reshaping energy markets and threatening to push the global economy toward stagflation.
The conflict began on February 28th when the United States and Israel conducted air strikes on Iranian military targets, which included the assassination of the Supreme Leader. Iran’s response was fast. They transmitted warnings to vessels in the strait, stating that no one was allowed to pass, and Iran then closed the strait. Following that, military escalation has been intense. American forces destroyed a number of Iranian vessels believed to be laying naval mines in the strait, while Iranian drones struck several commercial vessels in the waterway. By mid-April, the U.S. established a naval blockade of Iran, creating a “dual blockade” stopping traffic from both sides.
The energy shock has been historic. This disruption has been characterized as the largest supply disruption in the history of the oil market, with the conflict bringing supply shortages, currency volatility, and heightened risks of stagflation and recession. Crude surged past $120 per barrel, and the collective oil production of Kuwait, Iraq, Saudi Arabia, and the UAE dropped by at least 10 million barrels a day. The World Bank has warned of a sequence of damages. The war is hitting the global economy in waves. First through higher energy prices, then higher food prices, and finally higher inflation which increases interest rates and makes debt even more expensive.
The most recent developments suggest an easing. Earlier this week, Iran said they will de-mine the strait and reopen it in the meantime as the two sides come to an agreement. In addition, the United States would end its blockade of Iranian ports. The most important items to be talked about during the ceasefire are thought to be Iran not pursuing nuclear weapons and how to dispose of Iran’s supply of uranium, which has already been used for nuclear weapons. Markets have reacted cautiously to the optimism. Iran has stated that vessels must coordinate passage through the strait, and the Persian Gulf Strait Authority has published a map marking a zone where vessels can’t operate without authorization.
For the global economy, oil prices most likely won’t come down in the near future. Also, supply chains will remain disrupted, and the inflationary damage already done will take months, if not longer, to settle. At this point, it’s anyone’s guess what will happen next.
