SPOTLIGHT: The economic impact of the Middle East conflict
March 2026
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Weeks after U.S. and Israeli strikes on Iran prompted Iranian retaliation and the near-closure of the Strait of Hormuz, which carries 20% of the world's crude supply, the economic fallout is moving faster than most forecasters anticipated.
U.S. oil prices have risen as high as $120 a barrel, double the price at the start of 2026, with swings of up to $40 in three weeks.
The average gallon of diesel has surpassed $5.20 nationwide, a roughly 40% increase from a month ago. Gasoline is hovering near $4 nationally; in California, the average hit $5.82 on Tuesday, up from $4.63 a month earlier.
Energy costs are already being passed on to consumers, squeezing incomes and braking spending.
Fed Chair Jerome Powell has acknowledged the effects on core inflation are “real and material.”
Read more via Politico, The Wall Street Journal, The New York Times, The Wall Street Journal, Axios
Small, independent truckers own their rigs and pay fuel costs out of pocket, leaving little cushion.
For most freight companies, the 40% diesel spike translates to a roughly 10% overall cost increase, according to UC Davis economist Erich Muehlegger.
Consumer prices won't rise immediately, but costs are already moving through the supply chain, particularly for fresh food.
Heavier, bulkier, lower-cost goods are most vulnerable to price hikes.
Read more via The Wall Street Journal
With the national average for a gallon of regular gas approaching $4, up more than $1 in the past 30 days, consumers around the country are consolidating errands, skipping nights out, canceling road trips, and cutting discretionary spending to compensate. For an economy driven by consumer spending, the behavioral shift matters.
The $4 threshold is psychologically significant: the last time gas hit that level nationally, in 2022, it triggered a broader pullback in discretionary spending. Economists note that gas prices are uniquely visible, displayed on street corners, making them a barometer for how people feel about the broader economy.
Rising gas costs are hitting on top of already elevated electricity and natural gas bills, removing the cushion that falling pump prices had provided over the past year.
Low-income workers and those without access to public transit, who must drive regardless of cost, have the least room to adjust.
Consumers tend to think in budget "buckets" rather than total spending, meaning stress in one category, like gas, spills over into cuts elsewhere, even when total budgets might technically absorb the hit.
Federal Reserve Vice Chair Philip Jefferson said last week that while current Fed policy is "appropriately positioned," rising energy prices from the Middle East conflict pose a real risk to both inflation and consumer spending if they persist beyond the short term.
Jefferson expects inflation to tick higher in the near term due to rising energy costs, but said the effect of a short-term spike would likely last only a quarter or two. Sustained higher oil prices, however, "could have a more material effect."
On the labor market, Jefferson expects unemployment to hold near 4.4% through the end of the year, but warned that employers are hiring at very low rates, leaving the market vulnerable to adverse shocks, with risks “skewed to the downside.”
Read more via Reuters, Federal Reserve
The World Trade Organization projects trade volume growth of 1.9% this year, dropping to 1.4% if elevated oil prices persist, down sharply from 4.6% in 2025.
Eurozone consumer confidence fell to minus 16.3 in March, its lowest since October 2023 and the largest single-month drop since March 2022.
A sustained rise in energy prices could push average eurozone inflation to 2.7% this year, up from a pre-war estimate of 1.8%.
Germany's economy alone could face a €40 billion ($46 billion) hit over two years if oil holds at $100 a barrel. German wholesale power prices already stand at $132 per megawatt hour, versus $48 in the U.S.
Economic activity in India expanded at its slowest rate since October 2022. Before the war, 60% of India's liquefied petroleum gas came from the Gulf.
Egypt's monthly gas import bill has nearly tripled, from $560 million to $1.65 billion.
Australia and Japan both recorded slowing activity in March PMI data.
The economic outlook has weakened significantly, but all now rests on how the conflict unfolds."
Read more via The Wall Street Journal, Reuters, ING, APA News
The closure of the Strait of Hormuz has cut off a critical source of the world's fertilizer supply, sending prices surging just as farmers in the northern hemisphere prepare for spring planting.
The Middle East accounts for more than a third of global urea exports and roughly a quarter of ammonia. The Strait closure is physically blocking shipments at a single chokepoint with no easy workaround.
Prices for urea, the most widely used nitrogen fertilizer, have hit their highest level in more than three years. Phosphate and sulfur supplies are also at risk, with roughly half of global sulfur trade passing through the Strait.
India, the world's largest urea buyer, has scrambled for alternative supplies and some fertilizer plants have shut down as natural gas needed to produce nitrogen-based nutrients runs short. Greece, France and Ghana have all rolled out financial support or free fertilizer programs for farmers.
China, the world's largest urea producer, is restricting exports while shielding its own farm system, giving it significant leverage over global supply. Russia briefly paused some fertilizer exports this week as well.
The risks are most acute in sub-Saharan Africa and parts of South Asia, where food imports are high and hunger is already widespread.
Experts warn the impact to the global food supply "could be catastrophic" if the conflict extends.
Read more via Bloomberg
Interior Secretary Doug Burgum said Tuesday the energy shock would last "weeks, not months."
Oil executives and analysts were less optimistic, warning the spike could last considerably longer and threatens to be a severe drag on the global economy.
Read more via Politico, The Wall Street Journal
