Krugman Warns Iran Conflict Could Cripple U.S. Economy
The U.S. economy’s stability has been precarious for some time, and the escalating conflict in Iran presents a significant catalyst for a potential downturn on American soil. Despite the war being only a week old, economists and analysts are already identifying ways the conflict could trigger a broader economic crisis within the United States. According to Nobel Prize-winning economist Paul Krugman, a prolonged war, coupled with the targeting of vital energy infrastructure within the global oil and gas trade, would undoubtedly inflict an economic burden on the U.S., a situation he described as a “war of whim” characterized by a rising daily cost. Krugman, in a Substack post published Wednesday, characterized the situation as a potentially manageable shock for the U.S. if isolated, but cautioned that, when combined with the already fragile and uncertain economic outlook at home, the nation’s involvement in the Middle East carries a substantial and escalating price tag. “It isn’t occurring in isolation,” Krugman wrote. “There are many stresses on our economy, and this could be the straw that breaks the camel’s back—a straw that becomes heavier the longer the war goes on.”
The primary economic risk stemming directly from the conflict centers on the disruption of energy supplies, specifically oil and gas. The Strait of Hormuz, a narrow waterway connecting the Persian Gulf to crucial global trade routes, has been effectively closed since the commencement of the war, eliminating approximately 20% of the global trade in liquefied natural gas and petroleum products that normally transit through the strait. This immediate reduction in supply has already led to a surge in energy and fuel prices across the U.S.; Brent crude, the global benchmark for oil prices, has risen by more than 10% since the conflict began. Furthermore, the average price for a gallon of gasoline in the United States has increased by around $0.20. As the conflict continues and global oil and gas supply remains restricted, these inflationary pressures are projected to intensify. The other significant risk identified by Krugman is damage to infrastructure utilized in the production and refining of gas and petroleum products. Reports indicate that some key facilities have already been targeted by missile fire, including a reported Iranian attack on Thursday directed at an oil refinery in Bahrain.
The potential cost of the conflict is already estimated to be around $1 billion per day, according to Representative Joe Morelle (D-N.Y.), who told CNN on Thursday that the Pentagon has, so far, been “unresponsive” regarding the conflict’s financial implications. To finance the U.S. campaign in the Middle East, administration officials are reportedly preparing a $50 billion request to Congress. The projected total cost for U.S. taxpayers could reach as high as $210 billion, as indicated by Kent Smetters, director of the Penn Wharton Budget Model, who shared this projection with Fortune this week. This projection encompasses any eventual disruptions to trade and energy supply, along with the financial consequences of a prolonged war.
While the economic repercussions of a protracted war would undoubtedly be felt, it is argued that the effect will likely not be as severe as past Middle Eastern conflicts. Some commentators have drawn parallels to the 1970s oil embargo, implemented by oil-producing nations in North Africa and the Middle East, which plunged the U.S. and other countries into years of low growth and high inflation. However, as Krugman and others have pointed out, the world’s reliance on oil has diminished considerably over the past five decades. Although disrupted supply from the Middle East would inevitably cause inflation, the impact is predicted to be less dramatic than it was in the 1970s.
The true risk for the U.S., according to Krugman, is the need to address the pressures stemming from the war in Iran alongside other existing economic challenges. Krugman highlighted the ongoing impact of tariffs – recently revived by the Trump administration after a Supreme Court ruling upheld their reinstatement – which continue to dampen growth prospects and inject uncertainty into the business world. Another concerning scenario, according to Krugman, would be a prolonged war compounded by the projected economic impact of the Trump administration’s immigration policies, which the Congressional Budget Office recently predicted will remove more than 2 million people from the labor pool over the next decade. More immediately, the costs associated with the conflict could intersect with growing fears surrounding the potential displacement of jobs caused by artificial intelligence, or the possibility of a reversal in fortunes on financial markets and business confidence. “The key point is that this latest economic shock isn’t happening on its own,” Krugman wrote. “Now, we’ve added a fresh level of massive uncertainty.”
