Which leading economies will pay the biggest price for the Iran war?
American consumers will feel pain at the petrol pump, but US is a net energy exporter unlike its European allies
Sam Fleming and Amy Borrett in London, and Myles McCormick in Washington
© FT montage; Getty Images/ReutersDonald Trump’s attack on Iran will deliver a bigger blow to European and Asian economies than to the US itself, which will be partly cushioned from the effects thanks to its large domestic energy sector, analysts say.
The US has been a net exporter of natural gas since 2017 and of oil since 2020, official figures show, meaning its own energy sector benefits from surging prices, even if the average American household will be hit hard by rising petrol costs.
By contrast, European and Asian economies reliant on energy imports face a much sharper surge in inflation, partly because natural gas prices in those markets are more volatile than in the US and have already jumped — and the fuel is crucial in their domestic energy markets.
“The US is insulated but not immune from the damage,” said James Knightley at ING bank.
That is because the US will not suffer supply interruptions to key commodities that will be seen elsewhere, he argued.
“Everyone will be worse off because the fundamentals of this is you have made a key factor of production more expensive,” agreed David Aikman, head of the National Institute of Economic and Social Research (Niesr) think-tank.
“But it will have an uneven impact across countries.”
How do the rising energy prices impact economies?
Brent crude leapt almost 30 per cent last week following the outbreak of war, while European gas prices ended the week about two-thirds higher.
The gains have been driven by fears of a sustained disruption of shipments via the Strait of Hormuz, a key artery for energy traffic, as well as losses of production elsewhere in the Middle East.
The higher prices, if sustained, will drive up inflation, curb household purchasing power and damage GDP growth in economies across the world.
Central banks may be forced to keep interest rates on hold for longer or even tighten policy, while governments face extra fiscal strain if they decide to intervene in energy markets to cushion the impact on voters.
Energy price changes serve as a “powerful mechanism of income redistribution across countries”, said Qian Wang, chief economist for the Asia-Pacific at Vanguard.
Oil exporters will save more of the windfall but consumers tend to cut spending immediately while financial markets take a hit, meaning overall global demand will suffer.
The severity of its impact will depend not only on how high prices rise but the duration of the surge and what governments do to try to ease the burden on consumers.
Which economies will see the biggest impact from rising gas prices?
The surge in gas prices has outstripped the increase in crude oil costs.
This will be costly for European economies such as Italy, Germany and the UK that are heavily reliant on gas imports.
Analysis of 15 economies from Oxford Economics suggests that the leap in energy costs will leave the biggest imprint on Italy, where inflation in the fourth quarter of this year could be driven up by more than 1 percentage point compared with the consultancy’s previous forecasts.
The Eurozone as a whole and the UK will see an uplift of more than half a point in projected inflation.
By contrast, US inflation in the fourth quarter will be boosted by just 0.2 percentage points, while Canada will be the least affected, according to the analysis.
China, India and South Korea are heavy importers of oil and gas that has been shipped from the Gulf, making them vulnerable as well.
China, for example, imports 70-75 per cent of its crude oil consumption.
A large share of its imports from the Middle East flow through the Strait of Hormuz.
However, China can fall back on larger oil stockpiles and pressure refineries to suspend exports as it protects supplies.
It also has the potential to turn to Russian imports.
Wang argued that the Chinese government may be able to intervene to limit the transmission from crude oil price to retail gasoline price and that slightly higher inflation might even be welcome given persistent “deflationary pressure” in the country.
The stronger dollar that has followed the start of the US attacks could also alleviate some appreciation pressure on the renminbi.
Big energy exporters such as Norway and Canada will see “more unambiguously positive” effects as they capitalise on higher prices while avoiding the threats to production and revenue that Middle Eastern suppliers such as Qatar face, said analysts at Capital Economics.
How does the energy surge impact the US given it is an energy exporter?
The shale revolution transformed the US into an energy superpower over the past two decades, making it the biggest producer of oil and gas in the world.
That means American producers are set to reap the rewards of higher prices, especially if the conflict drags on and prices remain elevated.
US equities have come under less pressure than some markets in Europe and Asia since the conflict started, suggesting some investors are betting on less of a drag on GDP for North America than in other major economies.
High US production partially shields consumers, notably in natural gas, where the global market is somewhat fragmented.
While European and Asian natural gas prices surged last week, US prices only inched up.
A lack of spare LNG liquefaction and export capacity will limit US producers’ ability to export gas to other markets, helping to keep a lid on American gas prices, said David Oxley at Capital Economics, describing the US as a “gas island”.
But in oil, where the market is more global, American consumers are likely to be squeezed.
West Texas Intermediate, the US crude benchmark, last week notched its biggest weekly rise in records stretching back to 1983.
That has fuelled a jump in US petrol prices, which hit $3.32 per gallon on Friday, according to the AAA, up from $2.98 a week earlier and marking their highest level since 2024.
Oil prices jumped further on Monday, with Brent, the international benchmark, surging 25 per cent in Asia trading to $116.17 a barrel.
West Texas Intermediate, the US marker, rose 28 per cent to $116.29.
Goldman Sachs has warned that if the crisis drags on throughout March, oil prices would “likely” exceed their 2008 and 2022 peaks when Brent surpassed $147/barrel and petrol blew past $5/gallon, respectively.
The price surge poses a risk for Trump and threatens to worsen an affordability crisis that has become his biggest liability with voters ahead of November’s critical midterm elections.
Many studies show that rising petrol prices hit poor Americans hard, as they tend to work in jobs needing more road travel and spend a higher proportion of their income on fuel.
What does this mean for central banks?
Economic textbooks suggest that central bankers can “look through” surges in energy prices, on the basis that they trigger a temporary upsurge in consumer prices, but this would subside if household inflation expectations are well anchored.
By eating away at household budgets, energy cost increases ultimately lead to softer demand that can help restrain inflation.
However, the recent experience of high inflation rates following the Covid-19 pandemic and Russia’s full-scale invasion of Ukraine means household inflation expectations are more elevated in some countries.
Workers chased higher pay deals during the recent episode and companies redrew their pricing strategies.
Thus, said Michael Saunders of Oxford Economics, the “updated playbook” for central bankers is that if there is an energy price shock, “be ready to lean against risks of higher inflation expectations and persistent inflation through tougher language and tighter monetary policy or less easing than might have been expected”.
This has already played out in money markets.
Investors now not only see the Bank of England keeping rates unchanged at its announcement on March 19, but they are no longer fully pricing a single further cut from 3.75 per cent before the end of the year.
Before the conflict, swaps contracts were fully pricing two quarter-point reductions this year.
Meanwhile, in the Eurozone, investors are already beginning to price in the possibility of a rate increase by the European Central Bank in response to the new inflation threat, even though policymakers insist that it is too early to draw conclusions.
In the US, Federal Reserve chair Jay Powell had already indicated that the central bank was likely to keep rates on hold in the near term — a position the potential for an inflationary surge is likely to reinforce.
Rate cut predictions in the futures market have fallen, with traders betting on one to two cuts this year rather than two to three, with the first expected in September instead of July.
“In our view the Fed . . . has the time to wait and see on Iran and will take full advantage of this,” said Krishna Guha, head of economics at Evercore ISI.
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