The US and Iran are essentially locked in a war of attrition, where both sides are attempting to outlast the other. Iran is enduring literal military strikes on its territory. But the US is taking body blows, too — to its economy.
That’s because the war has effectively closed the Strait of Hormuz, a narrow channel between Iran and the United Arab Emirates that one-fifth of the world’s oil passes through. And while the US buys very little oil from the Gulf these days, it’s still exposed to the global oil market. Any decline in supply increases prices.
Most Americans feel this first at the pump. As of Tuesday, the average cost of a gallon of gas had climbed to $3.54 from $3.11 a week prior. But gas is just one piece of a much more complicated economic puzzle.
“The feed-through from energy prices really hits every consumer item, every intermediate item, every machine, anything manufactured, almost anything you can buy,” The Economist’s Mike Bird told my colleague Noel King. “Almost everything is affected by energy.”
This can be a bit abstract, so let’s look at a specific example: food. Food may not seem especially vulnerable to oil prices, outside the obvious: If gasoline, diesel fuel, and jet fuel get more expensive, then the cost of importing, transporting, and delivering products gets pricier, too.
But the food industry is highly sensitive to energy costs, and the price of transportation is just the start. (“We almost literally eat oil,” jokes the economist Veronika Dolar.)
Foods are commonly packaged in plastic, for instance, which are sometimes created from oil “feedstocks.” Some processed foods contain dyes, additives, and preservatives derived from petroleum.
Oil is also a significant component in fertilizer, and fertilizer costs are closely pegged to oil prices, Bird said. Rising fertilizer prices could increase the cost of some foods, as well — either directly or by prompting farmers to plant less.
The economy is complicated and multifaceted, of course. Food prices could take time to go up, and it’s unclear how much they will increase or in which parts of the world. (Among many other factors, the jump in oil prices will likely prompt US producers to drill more — helping turn prices the other way.)
But you can still see how this generates inflationary pressure, especially as it multiplies across fuel-dependent industries, from travel to construction to household goods. And importantly, as Americans spend more money on things like gas and food, they may have less left for discretionary purchases.
Iran is betting that President Donald Trump won’t ultimately be willing to stomach that, especially as the midterm elections draw nearer.
“If you see…prices rise across the economy as they have for the past few years, that is going to be pretty bad for the Republicans,” Bird said. “It's going to be a really, really hard sell.”
Listen to the full podcast episode about the cost of the war here.
