Financial Times: Which Major Economies Will Pay the Highest Price for Iran War?

American consumers will feel the pressure of rising fuel prices at gas stations, but unlike European allies, the U.S. is a net energy exporter.

© FT Composite; Getty Images/Reuters

Analysts say Donald Trump’s attack on Iran will have a greater impact on European and Asian economies than on the U.S., which will somewhat mitigate the effects due to its large domestic energy sector.

Official data shows that since 2017, the U.S. has been a net natural gas exporter, and since 2020, a net oil exporter, meaning the U.S. energy industry will benefit from soaring prices, even though ordinary American households will bear the brunt of higher gasoline prices.

In contrast, energy-import-dependent economies in Europe and Asia face more severe inflation, partly because natural gas prices in these markets are more volatile and have already risen sharply—natural gas being vital to their domestic energy markets.

James Knightley of ING said, “While the U.S. is somewhat insulated, it is not completely immune.” He explained that this is because the U.S. is less likely to suffer from disruptions in key commodity supplies compared to other regions.

“Everyone’s situation will worsen because the root problem is that you’ve increased the prices of key production factors,” said David Oxley, director of the National Institute of Economic and Social Research (NIESR). “But the impact is not evenly distributed across countries.”

How do rising energy prices affect the economy?

Since the outbreak of war, Brent crude oil prices surged nearly 30% last week, and European natural gas prices increased by about two-thirds. The main reasons for the price hikes are market concerns over continued disruptions in the Strait of Hormuz (a critical energy transit route) and declining production in other parts of the Middle East.

If prices continue to rise, it will push up inflation, weaken household purchasing power, and harm GDP growth in global economies. Central banks may be forced to keep interest rates unchanged longer or even tighten monetary policy; meanwhile, governments may intervene in energy markets to ease voter concerns, adding fiscal pressure.

Wang Qian, chief economist for Asia-Pacific at Vanguard, said energy price fluctuations are “a powerful mechanism for income redistribution among countries.” Oil-exporting nations will save more of their windfall profits, but consumers tend to cut spending immediately, and financial markets will be affected, which could suppress overall global demand.

The severity of the impact depends not only on the magnitude of price increases but also on how long prices stay high and what measures governments take to ease the burden on consumers.

Which economies will be most affected by rising gasoline prices?

Natural gas prices have surged more than crude oil prices. This will impose a heavy economic burden on European economies heavily reliant on natural gas imports, such as Italy, Germany, and the UK.

An analysis by the Oxford Economics Institute of 15 economies shows that the surge in energy costs will have the greatest impact on Italy, with inflation in the fourth quarter potentially exceeding previous forecasts by more than 1 percentage point.

The analysis indicates that overall eurozone and UK inflation expectations will rise by more than 0.5 percentage points. In comparison, U.S. inflation in the fourth quarter is expected to increase by only 0.2 percentage points, with Canada being least affected.

Capital Economics analysts said that large energy-exporting countries like Norway and Canada will see “more clearly positive” effects because they can benefit from higher prices while avoiding the production and income threats faced by Middle Eastern suppliers like Qatar.

Given that the U.S. is an energy exporter, how will soaring energy prices affect the U.S.?

Over the past two decades, the shale gas revolution has made the U.S. an energy superpower, the world’s largest producer of oil and natural gas.

This means U.S. producers will benefit from higher prices, especially as conflicts persist and prices remain high.

Since the conflict began, U.S. stock markets have been under less pressure than some markets in Europe and Asia, indicating that some investors believe the conflict will have a smaller drag on North American GDP than on other major economies.

U.S. high production levels have somewhat protected consumers, especially in natural gas, because the global natural gas market is more dispersed. Last week, European and Asian natural gas prices soared, while U.S. natural gas prices rose only slightly.

David Oxley of Capital Economics said that due to limited liquefied natural gas (LNG) liquefaction and export capacity, U.S. producers’ ability to export natural gas to other markets will be constrained, helping to keep U.S. natural gas prices in check. He described the U.S. as an “island of natural gas.”

However, in the global oil market, U.S. consumers may face greater pressure. U.S. benchmark West Texas Intermediate (WTI) crude oil surged last week to its largest weekly gain since 1983.

According to AAA, this caused U.S. gasoline prices to spike, reaching $3.32 per gallon on Friday, up from $2.98 a week earlier, the highest since 2024.

On Monday, oil prices further increased, with international benchmark Brent crude jumping 25% during Asian trading to $116.17 per barrel. U.S. benchmark WTI rose 28% to $116.29 per barrel.

Goldman Sachs warned that if the crisis persists, oil prices are “likely” to surpass peaks seen in 2008 and 2022, when Brent crude exceeded $147 per barrel and gasoline prices topped $5 per gallon.

The surge in oil prices poses a threat to Trump and could worsen the public’s affordability crisis, which has become his biggest vulnerability ahead of the crucial midterm elections in November. Multiple studies show that rising oil prices hit the poor hardest in the U.S., as they often rely on frequent driving for work and spend a higher proportion of their income on fuel.

What does this mean for central banks?

Economics textbooks suggest that central banks can “ignore” soaring energy prices because energy price increases cause only temporary rises in consumer prices, which will subside if households’ inflation expectations remain stable. Rising energy costs erode household budgets, ultimately weakening demand and helping to curb inflation.

However, high inflation caused by the pandemic and the Ukraine war has led to higher inflation expectations among households in some countries. During this period, workers have competed for higher wages, and companies have readjusted pricing strategies.

Therefore, Michael Sanders of Oxford Economics said that the “latest strategy” of central bank governors is to be prepared to respond to higher inflation expectations and persistent inflation risks with more hawkish language and tighter monetary policy, or less easing than expected.

This has already been reflected in the currency markets. Investors now expect the Bank of England to hold interest rates steady in its March 19 announcement, and on Monday, they had partially priced in rate hikes through 2026. Before the conflict, swap contracts had fully priced in two 25-basis-point rate cuts this year.

Meanwhile, eurozone investors are betting that the European Central Bank may raise interest rates due to new inflation threats, although policymakers insist it is too early to draw conclusions.

In the U.S., Federal Reserve Chair Jay Powell has previously indicated that the Fed may keep rates unchanged in the short term—rising inflation could reinforce this stance.

Futures markets have lowered expectations for rate cuts, with traders betting on one or two cuts this year instead of three, with the first cut now expected in September rather than July.

“We believe the Fed has time to observe the Iran situation and will make good use of it,” said Krishna Guha, chief economist at Evercore ISI.

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