Potential Economic Impact of Military Conflict on the United States

In the midst of global trade tensions, an escalating Israel-Iran conflict could be pushing the world closer to a full-blown war. This conflict, thousands of miles away, has American businesses and consumers on edge, as they may not escape the economic fallout.

Federal Reserve Chair Jerome Powell addressed reporters following the central bank's latest monetary policy meeting, stating that officials are keeping a close eye on the situation. Powell noted that when turmoil arises in the Middle East, energy prices tend to spike but usually subside. However, he added, in the 1970s, these shocks led to a prolonged period of high inflation due to significant disruptions in the global oil market.

Economists remain skeptical that the conflict isn't a major risk to the U.S. economy. For instance, JPMorgan economists recently stated that the US and the global economies are gearing up for multiple shocks this year, with the potential for a Middle East war being chief among them.

The Strait of Hormuz: A Crucial Bottleneck

One of the primary impacts on US consumers would be if the Strait of Hormuz—a critical maritime passageway connecting the Persian Gulf to the Gulf of Oman—were to be blocked, leading to disruptions in the flow of oil and gas. The US Energy Information Administration referred to the Strait of Hormuz as one of the world's most important oil chokepoints, with an average of 20 million barrels of oil per day passing through it in 2021. This amounts to approximately 20% of global petroleum liquids consumption.

Iran has repeatedly threatened to shut down the strait as a means of retaliation, which, if carried out, could potentially trigger a severe spike in energy prices. However, analysts suggest that Iran may only selectively block vessels depending on their flags and destinations to minimize long-term damage to global energy supplies.

A Twin Shock: Tariffs and Energy Prices

While tariff-related price hikes have yet to show up in comprehensive inflation reports, economists believe they're only a matter of time. As the economy recovers from the pandemic, inflation has accelerated worldwide. Then, as the war between Russia and Ukraine unfolded, gas prices skyrocketed, further exacerbating inflation.

If gas prices surge due to the Israel-Iran conflict, the resulting strain on consumer wallets could intensify an already slowing economy. With tariff-induced price hikes already on the horizon, higher gasoline prices would put additional strain on household budgets, potentially leading to a more pronounced economic slowdown.

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The potential economic impact on the U.S. economy if the Israel-Iran conflict escalates and leads to the closure of the Strait of Hormuz would be significant and multifaceted:

Impact on Oil Prices and Inflation

The Strait of Hormuz is a critical chokepoint for global oil supply; it facilitates the transit of about one-fifth of the world's oil shipments. Closure would immediately halt exports from major producers like Saudi Arabia (9 million barrels per day) and the UAE (3 million bpd), causing crude oil prices to surge well above $100 per barrel, potentially spiking to $120 or more[2][4].
Although the U.S. imports only about 0.5 million barrels per day of crude oil from Persian Gulf countries through the Strait, the surge in global oil prices would directly affect U.S. energy markets and consumer prices[1][2].
Crude oil prices account for roughly 12% of the U.S. Consumer Price Index (CPI). A spike in oil prices would increase inflation, potentially adding an estimated 0.5% to the CPI and complicating the Federal Reserve’s monetary policy efforts. This inflationary pressure could prolong the Fed’s tightening cycle, slowing economic growth and raising costs for consumers[2][5].

Broader Economic Effects

Higher oil prices would cause increased production and transportation costs, feeding inflation across multiple sectors beyond energy alone[5].
The resulting inflationary environment and volatile energy prices would likely reduce consumer spending and business profits, potentially leading to job cuts and lower investment within the U.S. economy[4].
Global financial markets could react with high volatility and risk aversion, impacting equity markets and possibly causing a flight to safe-haven assets such as gold and the U.S. dollar, which might have mixed effects on different sectors of the economy[4][5].

Geopolitical and Supply Chain Risks

The closure would trigger a supply shock affecting not only energy but also shipping insurance costs and logistics worldwide, raising costs for U.S. companies reliant on global supply chains[5].
The uncertainty could also heighten geopolitical tensions, potentially affecting international trade and investment flows involving the U.S.[4][5].

Summary

Closure of the Strait of Hormuz due to an escalation in the Israel-Iran conflict would sharply raise oil prices, worsen inflation in the U.S., slow economic growth through higher costs and reduced consumer spending, increase market volatility, and disrupt global supply chains. Given oil’s critical role in the U.S. economy and inflation metrics, the effects would be broad and deeply felt across many sectors[1][2][4][5].

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