The Iran war and the closure of the Strait of Hormuz are a painful reminder that for all the changes of the past decades, much of the world economy still runs on oil. With every additional day of war, the effects ripple out through the rest of the world. Might our fate be decided by the price of oil? On a daily basis, I’m asked about the economic implications of the war. Here’s the not-so-good, the bad, and the ugly.
Can an oil price spike cause a global recession?
Absolutely. In fact, a significant portion of recessions, at least since the advent of fossil fuels, have been caused by spikes in the price of energy. Maybe you are still smarting from the collapse of real-estate prices in 2008, but historically, problems with energy costs have been a bigger problem. Those days are back.
The most vulnerable nations here include South Korea and Japan, which have little in the way of domestic fossil fuels. They also are used to purchasing much of their oil from the Middle East. Import-dependent Latin American nations also are in dangerous positions. The closure of the Strait of Hormuz also has effects beyond oil; much of Africa faces a crisis in food prices, which depend indirectly on affordable fossil fuels.
