Hannah Jocelyn
Newsletter editor Not only did Donald Trump fail to adequately explain his reasoning for attacking Iran, nearly four weeks ago, but he also failed to plan for the shock the war would have on the global economy. Oil prices are soaring, and the conflict has raised the risk of a worldwide recession. In order to stabilize, Trump will have to negotiate the reopening of the Strait of Hormuz—but why would the Iranians want to do that? Shutting down the waterway by which a fifth of the world’s supply of oil and natural gas flows has been their most powerful move. “It may be too late,” Sudarsan Raghavan writes, in a piece out today, “for Trump to negotiate from a position of strength with Iran.” Also today, Isaac Chotiner speaks with an Iran expert about what concessions the country would want to reopen the strait and why an off-ramp—let alone a permanent peace—may be so hard to find. As the expert says, “the question at the end of the day is: Who’s going to blink first?” We asked John Cassidy—who writes in his column this week that the war could potentially torch the economy—to answer a few questions about what the stalemate might mean for the cost of living. How high could gas prices get? CASSIDY: That depends on two things: where you live, and how long the war lasts. At the national level, the average price for regular unleaded gasoline is now about four dollars a gallon, but in parts of California it’s already reached six dollars, or even higher. If the war ends quickly, or if there is an extended ceasefire that opens the Strait of Hormuz, the price of crude oil could rapidly fall back, and that would drive down gas prices. Conversely, the longer the conflict goes on, the higher the price of crude will go, and ditto for gas prices. If the crude price reached a hundred and fifty dollars per barrel for a sustained period—currently, it’s about ninety—the average gas price could rise to five dollars, or possibly more, experts say. How bad is this spike in oil and gas prices, compared with previous ones? Right now, it’s a big spike, but not unprecedented. In the summer of 2022, after Russia invaded Ukraine, and Western countries imposed sanctions on the Russian oil industry, the average gas price briefly reached an all-time high of slightly more than five dollars a gallon. If prices keep rising, we could match that level, or even exceed it. But when you are making historical comparisons you should also take into account over-all inflation, which raises the price of everything. In inflation-adjusted terms, the gas price would need to reach more than $5.50 a gallon to exceed the June, 2022, level, and it would need to get above $6 to match the price it reached during a big spike in 2008. What does a spike in oil prices do to the economy? The most obvious result is an increase in the cost of living. The prices of oil products—gasoline, heating oil, jet fuel—and of other products that rely heavily on oil as a raw material, such as fertilizers, all go up quickly. Households and firms are forced to spend more on these items. And, if fuel prices stay high for an extended period, there is potentially a second-round hit, as firms that use a lot of energy pass along their higher costs to consumers. You can already see that process starting: the C.E.O. of United just said that airfares will rise twenty per cent if the crisis isn’t resolved quickly. And, unfortunately, it won’t necessarily end there. If rising prices seem to be spreading throughout the economy, the Federal Reserve may get worried about inflation and could stop cutting interest rates or even raise them. After two big oil-price shocks, in 1973-74 and 1979-80, the Fed hiked interest rates, and in both cases the economy went into a recession. If the Iran war becomes a lengthy one, a repeat of those experiences is the biggest economic danger. | 
