The Strait of Hormuz is open again, but the economic damage from its closure isn’t going away.
Iran’s foreign minister announced Friday that the critical waterway — through which roughly a fifth of the world’s traded oil passes — is “completely open” for as long as the Israel-Lebanon ceasefire holds. The 10-day deal is set to last through at least April 26.
The reopening removes the most acute threat to the global energy supply after seven weeks of conflict that sent gas prices climbing, rattled Wall Street and squeezed household budgets across the country. But economists warn the shock has already moved through the economy, and much of it will stay.
“Prices for some things will come back, but not all the way back,” Mark Zandi, chief economist at Moody’s Analytics, told MS NOW. “Prices for other things, no, they’re sticky. They won’t come down. They’re going to be permanently higher.”
The uncertainty of the past seven weeks echoes the pandemic recession, Zandi said, and the economy is again flirting with recession. An oil shock of this kind, he said, moves through the economy in three waves.
The first is the most visible: prices at gas stations. Consumers pay a few cents more per gallon of gasoline, then a few cents more, and soon the increases start compounding. Retail gasoline is running roughly 21% higher than a month ago, according to the Bureau of Labor Statistics.
The second wave hits when those higher fuel costs affect everything else. Airfares climb with jet fuel. Ride-hailing and delivery trips cost more. Groceries rise as trucking and farm inputs grow more expensive. Car sales often slow when driving gets pricier, Zandi said. Construction materials climb, rippling into housing.
Businesses and consumers absorb the difference. The U.S. Postal Service has already announced it will increase shipping prices 8%, while UPS added a fuel surcharge — costs that small retailers and e-commerce sellers say they cannot swallow on their own.
“We’re probably going to have to pass this cost on to our customer,” said Rahama Wright, owner of skin care company Shea Yeleen. “And right now, everyone, they’re tightening their wallets because of everything that’s happening in our economy.”
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Lower down the income ladder, food banks are feeling the strain. A spokesperson for Food for Others, a food bank in Fairfax, Virginia, told MS NOW that demand has already grown compared with last spring, as families face higher food prices. While much of that increase traces to higher transportation costs, prices could further rise if fertilizer shipments are slow to resume through the strait — a shortage that Zandi said would almost certainly fuel more inflation.
These first two waves aren’t only domestic. Thailand and the Philippines have moved to curb fuel and energy use, and India has invoked emergency powers to divert natural gas from industrial users to households, according to a report from the U.N. Office for the Coordination of Humanitarian Affairs. All three nations are manufacturing hubs for goods that fill American shelves, including textiles, pharmaceuticals and electronics — meaning the strait’s effects will keep arriving at U.S. ports for months.
The third wave hits if employers are forced to raise wages in response to sufficiently high and lasting inflation, as employees’ purchasing power wanes. Inflation-fueled wage increases, Zandi warned, could cause a full recession. Whether or not the U.S. will enter this stage depends on how high oil prices get and how long they stay there, he said.
Whether the U.S. reaches that stage now depends on how quickly the strait’s reopening ripples through the economy. If the price per barrel of oil — which has traded at about $90 this week — settles around $80 in the coming weeks, Zandi said, the economy will probably avoid a serious downturn. But if prices go higher — if, say, the ceasefire ends without a deal between the U.S. and Iran, the strait closes back up and oil shoots to around $125 per barrel before settling at $90 after the conflict ends — “by my calculation, that’s enough to push this economy into recession,” Zandi said.
“We’re already in a pretty fragile state as it is,” he added.
Arielle Hixson and Selena Kuznikov contributed reporting to this story.
Adam Hudacek is a desk associate for MS NOW covering national politics in Washington, D.C.