The global oil market has changed radically since the beginning of the conflict - some countries, such as Japan, which has had a strategic oil reserve since 1978, are using it for the first time now. Other countries are also taking unprecedented measures to ensure the necessary oil for the normal operation of their enterprises and the normal life of people. With each passing day, however, it becomes more difficult. We are witnessing a macro shock and at such a moment three variables are of the greatest importance - scale, duration and secondary effects.
In the Iranian conflict, the scale of the disruption is already visible. Restrictions on traffic through the Strait of Hormuz are removing a significant share of the world's supplies of oil and other strategic materials from international markets. The duration of the conflict remains uncertain. Attacks on energy infrastructure continue, tanker traffic has not yet returned to normal, and Iran has signaled both a willingness and capacity to escalate, including through potential mining operations in the strait.
Although U.S. officials have raised the possibility of a pause in military operations, the outcome of the conflict depends on Iran’s response, leadership cohesion, and willingness to return to negotiations. Strategically, prolonging the disruption increases Tehran’s influence. When time is critical, the lack of urgency to de-escalate is itself informative.
Ultimately, the secondary effects will depend on how scale and duration interact. A short-term disruption could generate temporary volatility in energy prices. A prolonged shock would have broader implications for the global economy, central banks and investor sentiment.
Implications for the global economy
A prolonged energy shock would have profound and lasting macroeconomic consequences, economists warned, quoted by marketwatch.com. As long as transit through the Strait of Hormuz remains limited and regional infrastructure continues to be targeted by attacks, risks to oil prices are likely to remain tilted to the upside. Conversely, a sustained price decline would require visible signs of de-escalation, including rising tanker capacity and fewer attacks on energy assets. Partial or temporary solutions would likely stabilize markets only briefly.
Energy is a key driver of transportation, manufacturing and commodity prices. Commodities are “fast-moving” component of inflation, adjusting more quickly than services, which are driven by “slower” factors such as housing costs and labor markets. Although goods account for a smaller share of consumer price baskets, they account for a disproportionate share of inflation volatility. As a result, commodity shocks can be passed on to headline inflation more quickly than changes in the broader business cycle.
However, the global economy enters this episode in a different position than it did during the 2022 energy shock following the Russian invasion of Ukraine. Before the escalation in the Middle East, U.S. growth was improving, but from a relatively weak starting point. This backdrop suggests that second-round effects may be weaker this time around. Workers currently have less bargaining power to demand higher wages, which reduces the risk that an energy-driven inflationary surge will become self-sustaining.
Central Banks and Commodity Shocks
At this point, markets are facing a commodity shock that is not yet stagflationary. The distinction is important. Economic theory suggests that policymakers should often consider supply-side inflationary shocks to support growth.
But risk management calls for caution on the part of central banks. The experience of the post-pandemic inflation surge has made central banks more sensitive to the risk of weakening inflation expectations. Until there is greater clarity about the duration of the energy shock and its pass-through to prices, caution is likely to dominate policy decisions.