About one in five barrels of the world’s oil and liquefied natural gas used to pass through the Strait of Hormuz, and the Iran war has put that lifeline at risk. The conflict has pushed shippers and energy firms to pursue costly alternatives, lifted energy costs and prompted markets to rethink Federal Reserve policy, while Washington debates formal war authority. The result is a near-term scramble and a longer-term shift in energy and trade routes.

The war began weeks ago and quickly altered the map of global trade. Naval blockades, interdictions and the threat of renewed closures have made passage through the Strait of Hormuz less reliable. Richard Haass, a former State Department official, said that even if Tehran doesn't have explicit control, "there is now always an implicit measure of control" because Iran proved it could close the strait once.

That implicit control matters because the strait used to carry a large share of global oil and LNG. The Atlantic reported that roughly one fifth of those fuels transited the waterway. Disruption there raises shipping costs and forces carriers to reroute. It also concentrates geopolitical leverage in Iran's hands in a way it didn't have before the fighting.

Energy prices and markets

Energy markets reacted fast. West Texas Intermediate rose to about US$96 a barrel, roughly 40% above its prewar level, Business Insider said. The higher price is narrowing the room policymakers have to cut interest rates. Tom Graff, chief investment officer at wealth advisory firm Facet, warned that investors aren't fully pricing in the Fed-related risk created by the war. "A lot of people aren't thinking as much about the Fed as they should," Graff said.

That shift shows up in market pricing. Where traders had priced in several rate cuts this year, markets now expect fewer or no cuts. The change is significant because a number of bullish forecasts for equities had assumed easing by the Federal Reserve. Moody's Analytics chief economist Mark Zandi said the combination of weaker growth and higher oil threatens the earlier outlook for job growth and GDP gains. He told analysts that even if the war winds down quickly, the fallout will keep a GDP pickup from happening this year and raise recession risks.

Shipping and corporate moves

Companies that move oil and goods are already planning for higher costs. The Atlantic noted that energy firms and shippers are exploring investments in new pipelines, port expansions and alternative routes through the Red Sea. Those projects could require billions of dollars and take months or years to secure. The options are imperfect. Rerouting around the strait adds voyage time and fuel use. It raises insurance and chartering costs.

Those extra costs get passed along to buyers and consumers.

Mastheads

Executives at shipping firms have compared the scale of these changes to the supply-chain rewiring after the pandemic. The pandemic pushed companies to rethink single-source suppliers and long, risk-prone routes. The Iran war is producing the same sort of rethink for oil flows and maritime logistics. Firms are weighing the expense of new infrastructure against the risk that the strait could be closed again.

Political reaction and U.S. Oversight

At the same time, the war has stirred political debate in Washington. The conflict reached the 60-day mark as members of Congress pressed for more oversight. Senator Lisa Murkowski, Republican of Alaska, said she plans to introduce an authorization for use of military force if the White House doesn't present a credible plan within a week. Murkowski argued that Congress must "step in" to define U.S. Operations and require reporting to restore transparency.

Her move reflects broader unease among lawmakers on both sides. Some senators want votes to reject the administration's war authorities. Others want a new legal framework to guide U.S. Operations. The political uncertainty adds another layer of risk for markets and firms that must factor in the possibility of broader or prolonged conflict.

Who pays and who benefits

The immediate cost falls on buyers of oil and gas, and on firms that depend on timely maritime deliveries. Higher energy prices lift costs across manufacturing, transport and utilities. Some shipping companies will face higher insurance fees and longer voyage times. Those costs tend to show up in prices for finished goods and in tighter profit margins for firms that can't pass costs on to customers.

At the same time, the shift gives Iran geopolitical leverage. The Atlantic piece argued that Tehran's ability to close the strait once means it can extract concessions or rent from shipping interests in the future. The article suggested Iran might charge tolls or join a consortium to manage passage. Either option would change the economics of the waterway and could lock in new revenue streams for Iran.

Investors have already started to change behaviour. Some large investors moved into safer assets in the early weeks of the war. Others stayed in equities as markets recovered to record highs. The differing strategies reflect a debate about how persistent the war’s economic effects will be. Mohamed El-Erian, a noted investor, and other commentators signalled that expectations for central banks and markets have shifted since hostilities began.

Market tools show the shift. The CME FedWatch tool, cited in Business Insider, recorded a swing away from multiple rate cuts to a view that rates will hold. That matters for asset values. Stocks rose after hopes for cuts faded. But advisers like Graff warn that the upside in equities rests on an assumption that inflation will cool despite the higher oil price. If inflation stays elevated, central banks will be less able to ease policy, and growth forecasts could be revised down.

Building new pipelines or expanding ports is expensive and slow. The Atlantic described those moves as costly, multi-year efforts. Even small changes to routes can add days to sea voyages. For time-sensitive cargoes, those delays are meaningful. For bulk commodities like oil, the added fuel burn and charter fees add up. Several executives and planners told panels they expect impacts to last months, not days. At a Vanderbilt panel referenced in the Atlantic, participants estimated effects could run from two to nine months after hostilities subside.

Those timelines matter to firms and governments that must budget for higher energy bills and to investors deciding whether economic growth will recover. Mark Zandi’s view that job growth and GDP will be weaker this year is rooted in those higher costs and the reduced policy room central banks now face.

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This article was created with AI assistance.