The global economy is facing a potential sinking in the Strait of Hormuz, as energy expert Mamdouh Salameh issued a dire warning via the Tasnim news agency regarding the closure of this critical passage for world shipping. He emphasized that if this vital waterway remains closed for just two months, the damages to the global economy will reach approximately $5 trillion. At the same time, Mohamed El-Erian warns that as long as the war in the Middle East persists, recession risks will continue to mount for the American economy.
Impact on the US budget
Salameh highlighted that the situation could also dramatically increase the federal budget deficit of the United States. He predicted that the US will be forced to print fiat money, a move that will not only exacerbate domestic inflation but also burden the entire global economy.
The illusion of energy autonomy
The expert stressed that the view of the United States being protected due to its oil production autonomy is fundamentally flawed. Despite being the world's largest producer, the US still imports approximately 8 million barrels daily and remains tethered to global price fluctuations. Salameh referenced the policies of Donald Trump, noting his consistent demands for the OPEC+ coalition to increase production to keep prices between $49 and $60. Today, however, prices have doubled or even tripled. The expert pointed out that the US cannot militarily force the Strait open, as deploying warships to protect tankers leaves them vulnerable to Iranian missiles.
Risk of global recession
A continued disruption in oil supply threatens to push the global economy into a deep recession. The cost of this "economic warfare" includes price hikes in industrial products, food, and imports. Estimates suggest that a two-month closure of the Strait would result in losses totaling nearly $5 trillion.
Reactions of major oil consumers
Finally, Salameh emphasized that major oil-consuming nations will be forced to tap into their strategic reserves, a move that offers only limited short-term price relief while severely damaging energy security. This unstable international environment could lay the groundwork for new conflicts and wars. The Strait of Hormuz, situated between Oman and Iran, is one of the world's most critical transit points for international energy. Approximately 20% of global oil trade passes through daily, involving over 17 million barrels. Any traffic disruption can trigger immediate spikes in energy prices and severe global economic turmoil.
Dark forecasts from El-Erian
Simultaneously, renowned economist Mohamed El-Erian estimates that the war in Iran has significantly raised the odds of a US recession, but rising oil prices are not his only concern. El-Erian told Business Insider that the probability of a recession has climbed from 25% to 35%. This increase is primarily due to the fallout of the US-Iran war, alongside other factors weighing down the economic outlook.
Inflationary spiral
The abrupt surge in oil prices poses a major inflation risk, creating a "demand shock." With Brent crude hovering around $100 per barrel for over a week, disruptions are echoing through the entire supply chain. El-Erian describes a two-phase scenario: the first phase involves high inflationary pressure reducing consumer purchasing power; the second phase brings decreased economic growth and higher unemployment.
Risks of an "economic accident"
The economist warned that inflationary pressure could interact with "fragilities" in financial markets, such as low demand for government bonds and high equity valuations. A "major economic accident" would tighten financial conditions, restricting credit liquidity and dealing a severe blow to global demand.
Impact on consumption and employment
Rising energy costs are likely to stifle consumption, leading businesses to freeze personnel hiring. Already, US GDP for the fourth quarter was revised down to 0.7% annualized—roughly half of the original 1.4% estimate. February's job growth was a mere 92,000, while personal consumption saw only a marginal 0.4% increase in January.
Duration of war and stagflation risk
El-Erian warns that the longer the war lasts, the higher the recession risks become. Potential energy supply disruptions could lead to even higher oil prices and stagflation scenarios, where growth stalls while inflation remains stubbornly high. El-Erian also highlighted the risk of contagion from the private credit sector, as investors grow anxious over liquidity and asset managers face a surge in capital withdrawal requests. The situation remains critical for both the economy and financial markets.
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