Global economy faces recession risk as Iran war pushes oil past $105

U.S. and Israeli attacks on Iran have driven up prices, darkened the outlook for the world economy and sent global stock markets reeling, with the conflict now threatening to prolong the economic pain for months or even years.

"Historically, oil price shocks like this have led to global recessions," said Christopher Knittel, an energy economist at the Massachusetts Institute of of Technology. "You're raising the risk of higher inflation and lower growth," added Carmen Reinhart, a former World Bank chief economist, evoking the stagflation of the 1970s.

The war caused an immediate oil shock after Iran responded to U.S. and Israeli attacks on Feb. 28 by effectively closing the Strait of Hormuz, a transit point for a fifth of the world's oil. The price for a barrel of Brent crude oil climbed 3.4% on Friday to settle at $105.32, up from roughly $70 before the war began. Benchmark U.S. crude rose 5.5% to settle at $99.64 per barrel.

The conflict has delivered what the International Energy Agency calls the "largest supply disruption in the history of the global oil market," with the loss of 20 million barrels of oil a day. The damage to energy infrastructure, including a strike on Qatar's Ras Laffan natural gas terminal that wiped out 17% of its export capacity, will have long-lasting effects, with repairs expected to take up to five years.

Fertilizer and Food Prices Spike

The Persian Gulf accounts for a third of global urea exports and a quarter of ammonia, with up to 40% of the world's nitrogen fertilizer exports passing through the now-blocked Strait of Hormuz. The disruption has sent urea prices up 50% and ammonia up 20% since the war began.

The price hikes will likely make food more expensive as farmers facing higher costs are forced to skimp on fertilizer, leading to lower crop yields. The squeeze on food supplies will land hardest on families in poorer countries. Brazil, which imports 85% of its fertilizer, is particularly vulnerable, according to Alpine Macro commodity strategist Kelly Xu.

Rationing and Restrictions

Poorer countries are expected to be hit hardest by energy shortages as they are outbid for the remaining oil and natural gas supplies. "No country will be immune to the effects of this crisis if it continues to go in this direction,” International Energy Agency head Fatih Birol said on March 23.

Asia, which receives more than 80% of the oil and LNG that passes through the Strait of Hormuz, is especially exposed. In the Philippines, government offices are now open just four days a week, while in Thailand, public workers have been told to take the stairs instead of elevators. India, the world’s second-biggest importer of liquefied petroleum gas, is prioritizing households over businesses as it allocates its limited supply.

This article is for informational purposes only and does not constitute investment advice.