What it will mean for the economy if the Strait of Hormuz stays closed
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With shipping traffic at a near halt at the Strait of Hormuz, the possibility of prolonged disruption to supplies of oil and other important commodities has grown.
The big picture: If the military situation doesn't change soon, it will create a moderate stagflationary drag on the U.S. economy and a substantial one on Europe and East Asia.
- If oil prices spike substantially further, it would likely create a recession in major oil importers and do meaningful damage to U.S. economic prospects.
- Those are the implications of forecasters modeling a more sustained period of elevated prices.
State of play: Iran is prepared to attack commercial ships that try to pass through the strait, 21 miles wide at its narrowest point and surrounded on three sides by Iranian territory.
- Besides oil shipments, that means disruption to supplies of liquefied natural gas, raw materials for agricultural fertilizer, aluminum, steel and more.
- Efforts by American and other forces to overcome the blockade — including offering insurance where private insurers are unwilling and raising the prospect of U.S. Navy escorts — haven't yet proven workable.
- Oil markets have been exceptionally volatile this week, soaring and swooning based on the latest headlines.
By the numbers: Brent crude oil, the global benchmark, was up almost 10% Thursday morning, to $101 a barrel, as of 11:30am ET. It was $72.48 before the war began.
- Notably, the futures curve — the price of Brent crude in future months — remains highly elevated, indicating that traders view ongoing supply problems as more likely than not.
- Brent crude for delivery in July 2025 was at $91.60.
- It did not fall under $80 until December.
Zoom in: The U.S. economy has some degree of insulation from the crisis, not least because of high domestic oil output. But oil trades in a global market, so the pain can't be avoided.
- Goldman Sachs economists, in a report published late Wednesday, modeled a scenario where Brent averages $98 in March and April and then declines for the remainder of the year.
- That prompted them to raise their 2026 U.S. inflation forecast by 0.8 percentage point, to 2.9%. It trims their 2026 GDP growth forecast by 0.3 percentage point, to 2.2%.
- In a more extreme scenario, in which oil flows are disrupted for a full month and crude averages $110 in March and April, they see inflation at 3.3% and GDP at 2.1%.
Given those risks, Goldman economists Manuel Abecasis and David Mericle raised their odds of a recession this year by 5 percentage points, to 25%.
Zoom out: There are more extreme scenarios at play. Oxford Economics modeled a scenario in which global oil prices average $140 a barrel for two months — what they characterize as a "breaking point" for the world economy.
- That, they find, would be enough to push the eurozone, the U.K. and Japan into economic contraction. It would create an economic standstill in the U.S.
- "Oil prices at that level become economically overwhelming because the transmission to the economy broadens as financial market conditions tighten significantly," wrote Ryan Sweet and Ben May with Oxford Economics.
- It would cause global GDP to fall 0.7% and push global inflation to 5.1% this year, 1.7 percentage point higher than their March forecast.
Of note: "The rebound in financial markets has been quick following past major military conflicts in the Middle East since the 1990s, but this time could be more gradual," Sweet and May added.
