Iranian threats to block energy shipments through the Straight of Hormuz and the fate of the nation’s own oil and natural gas production efforts have been anxiously watched since the beginning of its conflict with Israel.
So far, both fronts have been on the sidelines, with observers closely monitoring what changing war dynamics could signal about the ultimate economic consequences of this conflict.
Oil futures have risen over 10% since the fighting started; the sense among analysts is that price pressures could ease if the war remains contained.
But things could quickly go sideways — for oil markets and the global economy — if the coming weeks bring concrete signs of escalation around the Strait of Hormuz.
“Should this key economic chokepoint be closed, that kind of disruption would send the price of oil toward $100 per barrel, or even above that,” wrote Joe Brusuelas, the chief economist for RSM US, in a Friday note.
Analysts at JPMorgan Chase have echoed these worries, calling a blocking of the Strait the “worst-case scenario” and suggesting the result could be to push inflation in the US to 5%.
That’s because this narrow waterway is where about 20% of the world’s oil and seaborne natural gas shipments pass between oil-producing Gulf states — not just Iran, but Saudi Arabia, Kuwait, Iraq, and others — and the rest of the world.
Iran has only made noise so far about closing the Strait, but at least one Iranian leader has reportedly said the US military getting involved could increase the odds.
Ali Yazdikhah, an Iranian lawmaker, was quoted by the country’s semi-official Mehr news agency as saying, “If the United States officially and operationally enters the war … it is the legitimate right of Iran in view of pressuring the US and Western countries to disrupt their oil trade’s ease of transit.”
Meanwhile, President Trump offered a move toward diplomacy in recent days, saying he will decide in the next two weeks about US action but also pushing back on notions he’s taking threats of force off the table.
As he told reporters recently, “I may do it, I may not do it. Nobody knows what I’m going to do.”
Noam Raydan, who studies energy and maritime risks at the Washington Institute for Near East Policy, notes that plenty of Iranian oil moves through the Hormuz passageway, so “there’s no reason for Tehran at the moment to block the Strait unless it really wants to shoot itself in the foot.”
How that changes, she notes, is if Iran’s oil infrastructure is severely damaged. “Iran will shut the Strait once it cannot export — this is my simple answer,” Raydan said.
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But that scenario is a long way off for now, with Israel apparently focusing most of its attacks away from fossil fuel facilities. Indeed, oil disruptions in Iran have been minimal despite fears that followed one Israeli strike on an oil refinery in Tehran.
This has left the world, including Federal Reserve Chair Jerome Powell, in a sort of wait-and-see mode.
“We’re watching like everybody else is,” the central banker told reporters this past week, though Powell suggested an easing of economic pressure is likely unless tensions in the region spike to levels not seen in nearly 50 years.
What also could emerge to rattle markets — though perhaps less dramatically — are other measures Iran has at its disposal. These range from terrorist attacks to the seizing of some commercial ships.
Experts note that Iran has a variety of other means to disrupt the world economy if its military situation gets more desperate.
Suzanne Maloney, the director of the foreign policy program at the Brookings Institution, noted in a recent analysis that Iran could run out of existing countermeasures soon and that a further escalation may include things like small-scale terrorist attacks and cyberattacks in addition to threats to the Strait of Hormuz.
But, she noted, these are options that “all entail risky tradeoffs, especially the prospect of precipitating US military intervention, which Tehran would prefer to avoid.”
The Washington Institute’s Raydan offered another possible disruption to watch, noting that “Iran is known for seizing commercial ships in the region in retaliation to US actions … so I’d say ship seizures are something to watch, and Iran has experience in that.”
Possible attacks on shipping were also brought up in a recent Capital Economics analysis that laid out the effects of four potential scenarios in the weeks ahead, ranging from a short conflict to regime change.
Perhaps the most economic uncertainty could come with a scenario of “long-lasting conflict with no off-ramp,” which, the group noted, could include regular attacks in the months ahead on shipping and energy transit from both Iran and its proxies.
That’s a scenario, they wrote, that “might result in a long-lasting higher oil price in the range of $130-$150 [per barrel], lift inflation in advanced economies by 2-2.5%-pts by end-2025 and would be a major risk-off event in markets.”
But the bottom line, the economists added, is that “we may not know the endgame for some time.”
Ben Werschkul is a Washington correspondent for Yahoo Finance.
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