Key Points

  • According to estimates by the Federal Reserve Bank of Dallas, if oil shipments through the Strait of Hormuz remain disrupted in the second quarter, the U.S. economy's annualized growth rate would slow by 2.9 percentage points.
  • Nearly 20% of the world's oil supply is shipped from the Persian Gulf through the strait. Dallas Fed economists say the potential market disruption from an Iran war could be five times greater than previous oil shocks, from the 1973 Yom Kippur War to the 1990 Gulf War.
  • The economists noted: "Even just market expectations of geopolitical-driven oil production cuts could trigger an oil price surge and global economic contraction, whether or not the related events actually occur. The same holds true when geopolitical events cause oil supply disruptions to become a reality."

Deeper Insights

Federal Reserve Chair Jerome Powell said Wednesday it is too early to tell whether the Iran war will lead to a sustained surge in oil prices, push up inflation, curb consumer spending, and weigh on economic growth.

"No one can tell us how the Middle East conflict will unfold on the ground and how long it will last," Chicago Fed President Austan Goolsbee said Monday.

In a CNBC interview, he said: "If the parties can resolve these issues and there is no lasting impact on gasoline and energy prices, that would clearly be a far better outcome than a prolonged conflict that begins to seep into inflation expectations."

Goolsbee added: "You would see long-term interest rates rise because market participants try to compensate for that."

Dallas Fed economists analyzed that if oil shipments through the Strait of Hormuz are disrupted in the second quarter, removing nearly 20% of the global oil supply from the market that quarter, the average price of West Texas Intermediate crude would be pushed up to $98 per barrel.

The resulting shock would reduce annualized global GDP growth by 2.9% that quarter, an impact comparable to the damage suffered by the U.S. economy.

The economists said that if the strait were blocked only in the second quarter, GDP growth would rebound by 2.2 percentage points in the third quarter, with cumulative growth losses from the fourth quarter of 2025 to the fourth quarter of 2026 limited to just 0.2 percentage points.

Conversely, if oil shipment disruptions last for three quarters, growth from the fourth quarter of 2025 to the fourth quarter of 2026 would be cut by 1.3 percentage points.

"The key point is that, historically, oil shocks are stagflationary shocks—they push up inflation while worsening employment conditions," Goolsbee said.

"This is the most difficult situation for central banks because there is no ready-made playbook," he said.

West Texas Intermediate crude futures fell about 10% on Monday to near $88 per barrel after President Donald Trump said U.S. and Iranian negotiators had made progress in resolving the conflict.

Trump ordered a five-day pause in U.S. airstrikes on Iranian energy facilities. Iran's Foreign Ministry denied that it was negotiating with the United States.

"There are factors outside the model that could cause oil prices to rise more than the model predicts," Dallas Fed economists said.

"For example, disruptions in the tanker market, higher tanker insurance rates, or changes in market expectations about how long the strait closure will last could push the oil price path higher, thereby affecting economic growth," they added.