WASHINGTON (AP) — The war with Iran is doing collateral damage to the world economy.

The conflict is driving up energy and fertilizer prices; threatening food shortages in poor countries; destabilizing fragile states such as Pakistan; and complicating options for the inflation fighters at central banks like the Federal Reserve.

Causing much of the pain: Iran shut down the Strait of Hormuz — through which a fifth of world’s oil passes — after the U.S. and Israel launched missile strikes Feb. 28 that killed Iranian leader Ayatollah Ali Khamenei.

“For a long time, the nightmare scenario that deterred the U.S. from even thinking about an attack on Iran and which got them to urge restraint on Israel was that the Iranians would close the Strait of Hormuz,’’ said Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund. “Now we’re in the nightmare scenario.’’

With a key shipping route cut off, oil prices have surged — from less than $70 a barrel on Feb. 27 to a peak of nearly $120 early Monday before settling closer to $90. They’ve taken gasoline prices with them.

According to AAA, the average price of U.S. gasoline has shot up to $3.48 a gallon from just under $3 a week ago. Prices could be felt even more significantly in Asia and Europe, which are more dependent on Middle Eastern oil and gas than the United States.

20 million barrels of oil a day go missing

Every 10% increase in oil prices – provided they persist for most of the year – will push up global inflation by 0.4 percentage points and reduce worldwide economic output by as much as 0.2%, said Kristalina Georgieva, managing director of the International Monetary Fund.

“The Strait of Hormuz has to be reopened,’’ said economist Simon Johnson of the Massachusetts Institute of Technology and recipient of the 2024 Nobel memorial prize in economics. “It’s 20 million barrels of oil a day going through there. There’s no excess capacity anywhere in the world that can fill that gap.’’

The world economy has shown it can take a punch, absorbing blows from the Russian invasion of Ukraine four years ago and from President Donald Trump’s massive and unpredictable tariffs in 2025.

Source: WPLG