Certainly, in the West, you can see that the reserves have fallen off a cliff, and are at their lowest level in years. We are reaching the end of our ability to draw down those reserves, and so I do think that, if Trump doesn’t actually figure out how to end the war in the next month or so, we are going to see another huge price spike.
If the war ends this month, it seems likely that we will see lower economic growth for the next year or so. We’re also going to see higher inflation. How are you thinking about these impacts?
So, in this scenario, where it ends quickly and we avoid the worst cases, we will probably lose about half a point of global G.D.P. growth. Global growth was expected to be roughly three per cent, and it will likely fall to around 2.5 per cent. That is something, but that’s nothing like the 2008-09 financial crisis, where the drop was more than one per cent, or COVID, where the drop was more than three per cent, right? It’s a hit, but not a debilitating hit. Clearly, the farming sector, both in the U.S. and globally, is taking a particular hit. And this is because agriculture is affected on both ends. Agriculture is very energy-intensive, and also needs a lot of transportation. Aside from the energy shock, the ag sector is also feeling the fertilizer shock. About a third of the world’s nitrogen-based fertilizer was going through the strait. Fertilizer prices for nitrogen-based fertilizer are up forty to fifty per cent, and others are up at least twenty per cent. So you’re seeing both your transport and your energy costs go up, and your fertilizer costs, too. That pinch is going to manifest in the back half of the year and into 2027, into global commodity-food prices, because one thing that’s happening, especially in the developing world, is that we are seeing less food go into the ground. Look at Southeast Asia, or elsewhere—there’s less rice planting because the economics don’t make sense right now. So you are probably going to see continued higher food prices for six to twelve months or more on the back end of this, because of that decline in planting.
And then the other thing is inflation, which is running hotter than it was. And I think the odds of reducing interest rates have now gone down. Inflation for April ticked up to 3.8 per cent on an annual basis, which is the highest since early 2023, and nearly twice the Fed’s stated target of two per cent. The reality is that that elevated inflation rate is going to make it harder for the new Fed chair, Kevin Warsh, to cut interest rates the way Trump wants him to, since lowering rates in a higher-inflation environment would probably just make inflation worse.
We’re also seeing mortgage rates tick up, so, at least for the second half of this year, whether you’re buying a house or a car, or you’re a corporation looking to borrow for your data center, the financing costs are definitely going to remain elevated. That’s going to affect a whole bunch of different industries. It will not be as acute as we’re seeing in the ag sector, which is, I think, really bearing the brunt of this—as well as aviation—but I think the costs will have a tail.
Does the belief that the economic impact will stay with us after the strait is opened also have to do with things that we aren’t totally sure about—for example, damage to energy networks in the region?
Iran, especially earlier in the war—less so in the last month, when we’ve had these more tit-for-tat strikes—was targeting energy infrastructure. They were targeting pipelines. They were targeting oil fields to some degree, and, because oil has largely not been able to get out of the strait, some of the Middle Eastern producers have had to shut down or slow down production because they don’t have a place to put it anymore. It’s going to take some time for crude oil to come back on. Now, that’s probably a matter of months, or weeks to months, rather than years. And the damage to the crude sector, by all accounts, is not outrageously severe, so, again, I think if we can get the strait open we can get things moving again, and we’re probably not going to see a particularly bad lag on the resumption of crude.
I worry more about liquid natural gas. Qatar is a huge L.N.G. producer, and they have had to slow down production. You run these enormously complicated facilities to liquefy it and cool it, and I think resuming that is going to take some time.
This could have some bad implications for Europe this winter. Europe likes to build up supplies for gas in the summer and fall, when they’re not using as much, and then draw it down over the winter. And, after the Russia-Ukraine war, Europe turned principally to the Middle East for gas, as well as to the U.S, and if the gas can’t get back online Europe could be in trouble, and might have to make a decision about whether they are going to get through a winter with relatively low reserves and just pray it’s not a cold one. Or they are going to have to start thinking about slowing down industrial production to save gas, or get back to maybe buying some more gas from Russia, which they really don’t want to do, for obvious reasons.
I will say though, that while this has been a disaster, and has not been great for the global economy, if I was going to talk about the one upside—and certainly not one the Trump Administration would appreciate—it would be that, by blundering into this protracted war, Trump is spurring a substantial global impetus to move forward with a green-energy transition.
What are examples of that?
China’s E.V. exports in April—the most recent month available—jumped forty per cent compared to a year earlier, with sales booming basically everywhere except North America, where tariffs and other restrictions block most Chinese E.V.s. China’s solar exports in April are up sixty per cent over 2025, as countries decide that they are tired of dealing with unpredictable oil and gas prices. You see huge booms in solar and E.V. production in parts of South Asia, Indonesia, Sri Lanka. We in America have felt this energy hit as a price impact, but other countries that were more directly reliant on oil from the Persian Gulf have felt this as a supply impact. You have countries in East Asia and South Asia that have had to tell government offices to move to Zoom a couple days a week because they’re trying to avoid burning gasoline. This war has made cheap Chinese solar and battery and E.V.s look all the more attractive, as a way to just not have to worry as much about your energy bill going forward. In the nineteen-seventies, with the oil shock, you saw the U.S. and Western Europe decide that they needed to have hydrocarbon reserves. They built up the Strategic Petroleum Reserve.
