Global Economy Reels as Strait of Hormuz Closure Triggers Oil Price Shock

The assassination of Iranian leader Ayatollah Ali Khamenei on February 28 has triggered what economists long described as the 'nightmare scenario' for the global economy. By effectively closing the Strait of Hormuz, a narrow waterway through which one-fifth of the world’s oil supply flows, the conflict has introduced a supply-side shock of historic proportions. The immediate disappearance of 20 million barrels of oil per day from global markets caused crude prices to skyrocket from under $70 a barrel to a peak of nearly $120 within days. While prices have since moderated to approximately $90, the floor for energy costs has fundamentally shifted, creating a ripple effect that touches every sector from logistics to agriculture.

For central banks, particularly the U.S. Federal Reserve, this crisis represents a profound complication of their primary mission. Having spent the last several years battling post-pandemic inflation, policymakers now face a fresh surge in energy and fertilizer costs that are largely immune to interest rate hikes. Maurice Obstfeld of the Peterson Institute for International Economics notes that the very scenario that once deterred military action—the closure of the Strait—is now a reality. The inflationary pressure is not limited to the pump; because oil is a critical input for fertilizer production, the conflict is directly threatening global food security. This is particularly dangerous for fragile states like Pakistan, where rising costs can quickly translate into political instability.

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Data from AAA shows national average gasoline prices jumping from $3.00 to $3.48 in a single week, a 16% increase that acts as a regressive tax on consumers.

In the United States, the impact has been felt most visibly at the gas station. Data from AAA shows national average gasoline prices jumping from $3.00 to $3.48 in a single week, a 16% increase that acts as a regressive tax on consumers. However, the pain is even more acute in Asia and Europe, regions that maintain a higher dependency on Middle Eastern energy exports. The response from Asian governments has been swift and desperate. In India, the government has begun prioritizing gas supplies for residential use, leaving the restaurant industry on the brink of collapse. Thailand has taken the unusual step of banning overseas travel for civil servants and mandating energy-saving measures like using stairs instead of elevators, while the Philippines and Vietnam are reverting to four-day work weeks and remote work to curb fuel consumption.