The economic damage from the shutdown of the Strait of Hormuz may take years to undo, both in the US and globally, predict analysts.
The economic toll is likely to exacerbate conditions in countries that are already food insecure.
Iran first closed the Strait — through which 20% of the world’s oil flows, along with fertilizers, aluminum, and some consumer goods — on March 4, severely restricting the passage of commercial shipping vessels. The move came amid the ongoing US-Israel-Iran war, which has reached its 7th week.
The US then began a naval blockade in the region April 13. On April 17, Iran announced the Strait was “completely open,” but then closed it again a day later, saying it would not reopen the Strait until the US ended its naval blockade. Trump fired back, accusing Iran of attempting to blackmail the US. Last week, he wrote a blistering post on Truth Social.
Battle lines drawn
“Open the strait, you crazy bastards, or you’ll be living in hell,” wrote the President, threatening to eviscerate Iran’s power plants and bridges if the country did not capitulate.
Both Iran and the US are firing on ships attempting to enter the Strait of Hormuz. Iran April 19 fired at two Indian ships, which were carrying Iranian oil. The US subsequently shot at an Iranian cargo vessel.
Trump’s rationale for getting into a war unpopular with the majority of the American public is to rid Iran’s capability of building a nuclear weapon. Iran has 440 kilograms of highly enriched uranium at 60%, which could easily be converted to weapons grade. About 25 kilograms of HEU are sufficient to make a nuclear weapon, according to the Bulletin of Atomic Scientists.
Oil prices immediately dropped about 10-11% after Iran’s brief reopening of the Strait. Oil prices had surged to $111 per barrel as war broke out. As of press time April 20, the price of crude oil hovers at $96 per barrel, a $29 rise over the past year.
Damage will take years to undo
But even if oil prices stay low, many countries will continue to face harmful impacts, which may be irreversible. “Even if oil prices decline now, some of the damage to the poorest countries in the world and to the most vulnerable populations in the world has already been done. We may not be able to undo it quickly,” said Dr. Anil Deolalikar, professor of economics at UC Riverside, speaking at an April 17 American Community Media news briefing.
Video by ACoM | Dr. Anil Deolalikar, Professor of Economics at UC Riverside and founding Dean of the School of Public Policy at UCR, says rising energy costs and the growing threat that fighting will spread into other regions of the Middle East are pushing poorer countries to the brink of humanitarian disaster.
The closure of the Strait comes at a critical time for farmers across the globe, occurring during planting season. Fertilizer prices jumped by 20-30%, amid shortages. “As farmers cut back throughout the world on planting, we will see a delayed impact on food crop harvests later on in the year as the agricultural cycle moves on,” said Deolalikar, noting that the impact would hit hardest in countries already facing food insecurity.
For millions of small farmers, particularly in developing economies, the consequences are existential. “Many of them live literally from paycheck to paycheck,” Deolalikar said. “Their finances depend quite a bit on stable input prices, and this has really increased the debt load on farmers,” he said, predicting there would be more farmer suicides in the year ahead.
Oil volatility will remain high
Ryan Nunn, director of research at the Budget Lab at Yale, described the current moment as one of the sharpest oil shocks in decades.
“We’ve seen roughly a $35 per barrel increase since before the conflict,” Nunn said. “If you stack that against other monthly changes, this is one of the largest increases we’ve experienced over the last 50 years,” he said, noting that volatility will remain high and supply chains will take significant time to normalize, even if the Strait is immediately reopened.
For consumers, the effects are already visible. “When oil prices go up, gas prices go up. But more broadly, you see inflation: prices will rise while economic activity declines,” Nunn explained.
Lower income households hit hardest
“One year from now, we could expect to see a little less than a half percent rise in the core price level, that’s the level that excludes energy, and a little less than a half percent fall in economic activity, in GDP.”
“Now that might sound small, but you do want to consider that GDP is roughly $30 trillion in the US. So that means about $115 billion less in output in a year,” explained Nunn.
And the burden is not evenly shared. “This kind of inflationary shock hits lower income households especially hard,” said Nunn. Lower income households are hit harder by price increases since they tend to spend a greater portion of their budgets on goods, have fewer options to trade down to cheaper alternatives and have little to no savings to absorb the shock, he explained.
Video by ACoM | Dr. Ryan Nunn, Director of Research for the Budget Lab at Yale, explains why energy prices shocks affects lower-income households more severely.
Even if oil prices continue to drop, consumers are unlikely to see it immediately. “The linkages between oil prices and what folks see at the pump are not instantaneous,” he cautioned. “Historically, oil price shocks take a while to subside: on average about one and a half years.”
Iran’s commitment to sovereignty
Dr. William Beeman, professor emeritus of anthropology at the University of Minnesota, says the disruption in supply chains caused by the closure and blockade of the Strait of Hormuz is rooted in a long-standing commitment to sovereignty shaped by history.
“Iran has been dominated by foreign powers for almost 200 years and Iranians are extremely sensitive to the fact that foreign powers have intervened again and again and again in their internal affairs,” he said.
That historical experience continues to shape the government’s behavior today. “Iran is doing everything to protect the revolution and the ideals of the revolution, and also to protect its national sovereignty,” he said. “And it’s willing to go to extreme lengths in order to be able to do this.”
US coercion is ineffective
External pressure from the US or Israel is unlikely to change that goal. “No amount of economic coercion, no amount of military coercion is going to deter the Iranian government from this major goal,” said Beeman. “They will go to the mat in order to be able to protect themselves, to protect their national sovereignty and to protect the ideals of what they see as the revolution.”
Ultimately, said Beeman, any resolution will require a fundamental shift in approach. Without understanding Iran’s historical and ideological perspective, diplomacy is unlikely to succeed, he stated.
Video by ACoM | Dr. William Orman Beeman, Professor Emeritus of anthropology at the University of Minnesota with a specialty in the Middle East, gives an overview of Iran’s nuclear history, including its role as a founding member of the Nuclear Non-Proliferation Treaty. He says the current conflict will not end unless the country is allowed to enrich uranium and continue with the peaceful development of nuclear power.
