The global economy’s exposure to the escalating conflict with Iran is a growing concern, with the International Monetary Fund issuing explicit warnings about potential damage to worldwide growth. Kristalina Georgieva, the IMF director, stated that US strikes on Iran could lead to a rise in oil prices, creating “secondary and tertiary impacts” that ultimately trigger “downward revisions in prospects for global growth.”
This exposure is primarily channeled through the Strait of Hormuz, a crucial maritime chokepoint through which a fifth of the world’s oil consumption flows. The Iranian parliament’s recent vote to consider closing this channel, in retaliation for a US attack, poses a severe threat of an oil supply shock, which would undoubtedly push up inflation and impede economic expansion worldwide.
Oil prices initially jumped over 5% on Sunday, hitting a five-month high of $81.40, reflecting immediate market anxiety. However, prices later retreated, with Brent crude falling to just over $76 a barrel on Monday. Nevertheless, the potential for extreme price hikes persists, with Goldman Sachs estimating oil could hit $110 a barrel if Hormuz flows are significantly curtailed for an extended period.
Against this backdrop, US Secretary of State Marco Rubio has branded a closure of the strait as “economic suicide” for Iran, urging China to influence Tehran given its heavy reliance on Hormuz for oil. Analysts at RBC Capital Markets have also advised against complacency, warning of “clear and present risk of energy attacks” from Iranian-backed groups and noting the fluidity of the situation, as evidenced by the reported U-turn of two supertankers in the strait.