Overnight, a wartime economy

What It Covers

A US military conflict with Iran triggers cascading economic risks across oil markets, global shipping, natural gas supply, treasury yields, and consumer prices. Economists from Brookings, Moody's, Harvard, and Peterson Institute assess how this shock compounds existing tariff and inflation pressures on an already fragile US economy.

Key Questions Answered

• •Oil price shock magnitude: When Russia invaded Ukraine in 2022, oil prices rose 2% on day one. The Iran conflict pushed prices up 8% on its first trading day. Roughly 20% of global oil transits the Strait of Hormuz, meaning any closure could remove 15 million barrels per day from global supply, amplifying price pressure significantly.
• •Stagflation risk for the Fed: The Federal Reserve faces a dilemma where rising oil-driven inflation conflicts with an economy that may need rate cuts. Federal funds futures markets are already pricing in fewer cuts, and rate increases are being discussed. With PCE and producer price inflation already running hot, the Fed has limited room to maneuver in either direction.
• •Gas prices and consumer psychology: Regular unleaded gas, currently near $3 per gallon, could reach $3.10–$3.25 quickly and peak at $3.50 if conflict extends into April. Since 70% of consumers say gas prices shape their economic outlook, even a temporary spike risks damaging consumer confidence, which currently serves as the primary engine sustaining US economic growth.
• •Natural gas supply disruption: Qatar's LNG production halt creates acute vulnerability for Europe and Asia. European natural gas inventories are already low post-winter, US LNG export terminals are running at 100% capacity with no ability to surge output, and no quick replacement exists globally. This mirrors the 2022 Russian supply shock that severely damaged European businesses and households.
• •Supply chain resilience strategy: Harvard Business School professor Willie Shi recommends companies hold higher inventory buffers, diversify away from single-source suppliers, and design for resilience rather than pure efficiency. Shipping reroutes around Africa add roughly 10 days per voyage, artificially reducing global shipping capacity and driving freight rates higher, with costs eventually passing through to consumer prices.