How the Iran War Is Expected to Affect US Prices, from Gas to Flights
The US-Israel war on Iran, now entering its fifth week, has effectively closed the Strait of Hormuz, a critical shipping route for oil and other essential materials. This closure is causing severe global oil shortages, forcing countries to implement drastic measures to conserve reserves. Even if a peace deal is reached soon, experts warn that unwinding the economic damage could take months, with ripple effects felt across the US economy.
Oil and Gas: A Sharp Rise in Costs
US gas prices have surged to their highest levels in years, with the national average hitting $3.97, a 30% increase over the past month. Diesel fuel, which powers the trucks transporting goods nationwide, has seen an even steeper rise of about 50%, or $1.69 more than a year ago, according to AAA data. Higher diesel costs are poised to impact transportation expenses, potentially driving up grocery prices, as approximately 85% of agricultural goods rely on truck transport.
Alex Jacquez, chief of policy and advocacy at the Groundwork Collaborative, explains that the effects of oil and gas shortages can be categorized into first-order and second-order impacts. First-order effects are direct, such as higher prices at the pump for consumers. Second-order effects are broader and indirect, potentially affecting the costs of crops, semiconductor chips, and medical devices, which may eventually trickle down to consumers. Jacquez notes, "It's just a matter of when they work their way through the supply chains. Maybe it's on next month's orders, or maybe next week's orders. But eventually, some of these increases we've seen are going to get passed through, if they get large enough."
Fertilizer: Challenges for Farmers
As the spring growing season approaches, US farmers are grappling with rising fertilizer costs and falling commodity prices. A third of global urea trade, a solid nitrogen fertilizer, passes through the Middle East, with about 20% of US imports coming from Qatar. Nitrogen fertilizer is crucial for growing corn, cultivated by around 500,000 US farmers, according to the National Corn Growers Association.
The White House has acknowledged the war's impact on farmers, with Kevin Hassett, director of the National Economic Council, stating that the administration has "a plan for every corner of the disruption, from fertilizer to getting fuel to the west coast." Hassett added that they have been seeking alternative fertilizer sources worldwide and have successfully secured "a lot of it," aiming to minimize disruption.
Helium: Disruption in Critical Supplies
The conflict has also disrupted the global helium supply after Iranian attacks in Qatar, the world's second-largest helium producer. Production at Qatar's Ras Laffan industrial complex, which supplies about 20% of global liquefied natural gas, has been halted. Helium is essential for aerospace, magnetic resonance imaging (MRI), and semiconductor chip production, including those used in AI technologies.
Jet Fuel: Soaring Airfare and Shipping Costs
Increases in oil prices are leading to higher jet fuel costs, with prices doubling since the war began, according to the International Air Transport Association. United Airlines announced cuts to flights due to surging fuel expenses, with CEO Scott Kirby noting that if prices remain elevated, it could add $11 billion in annual costs. An analysis by Deutsche Bank shows that average airfares across airlines, for both domestic and international trips, are up compared to last year.
Mortgage Rates: A Barrier in the Housing Market
Just as US mortgage rates were starting to decline in February, offering relief to home buyers and sellers, the average 30-year fixed mortgage rate has risen to 6.22%, its highest level in months. Mortgage rates are closely tied to the overall economy and interest rates set by the US Federal Reserve, which recently opted to leave rates unchanged due to economic uncertainty, partly driven by the Middle East conflict.
Joel Berner, a senior economist at Realtor.com, commented, "Rising mortgage rates are a major barrier to what should otherwise be a very favorable spring homebuying season. Ultimately, the current upward pressure on mortgage rates, stemming from the war and inflation fears, serves as the primary barrier preventing the spring housing market from capitalizing on otherwise favorable inventory and price conditions."
This multifaceted crisis underscores how the Iran war is straining American consumers, already burdened by rising housing, grocery, and healthcare costs, with a Gallup poll revealing that a third of Americans have skipped meals or foregone other needs to afford healthcare. The ongoing conflict continues to pose significant challenges to the US economy, affecting prices from gas to flights and beyond.
