Strait of Hormuz Closure: Assessing the Global Economic Impact

The closure of the Strait of Hormuz following military conflict with Iran, beginning February 28, 2026, represents a significant disruption to global oil supplies and poses substantial risks to the global economy. Recent analysis from the Federal Reserve Bank of Dallas quantifies these potential effects, revealing the magnitude of the crisis and potential economic consequences.

Geopolitical Context and Oil Supply Disruption

The ongoing military conflict between Iran and the United States and Israel has escalated tensions in the Persian Gulf, leading to attacks on oil infrastructure in Saudi Arabia, Kuwait, and the United Arab Emirates. The closure of the Strait of Hormuz, a critical chokepoint for global oil transport, initially stemmed from adjustments to insurance contracts for oil tankers, but the primary concern quickly shifted to potential attacks on shipping, leading to unsustainable losses and the potential for shipwrecks.

From a global perspective, a disruption of oil exports from the Persian Gulf is equivalent to a disruption in oil production. For oil producers in the Gulf, the inability to store or export oil necessitates production curtailments, a trend already observed in Iraq and Kuwait in early March 2026. A complete cessation of oil exports from the Gulf region would remove approximately 20 percent of global oil supplies, with roughly 80 percent of that volume destined for Asia. Federal Reserve Bank of Dallas

Historical Comparisons to Past Oil Shocks

Geopolitical events have historically caused significant oil supply shortfalls, including the Yom Kippur War in 1973, the Iranian Revolution in 1979, the Iran-Iraq War in 1980, and the Persian Gulf War in 1990. However, the current situation differs in scale. Previous disruptions removed between 4 and 6 percent of global oil supplies, whereas the current closure threatens a shortfall close to 20 percent – three to five times larger than previous events. Federal Reserve Bank of Dallas

Unlike past concerns about potential control of the Persian Gulf, or anticipatory price increases as seen in 1979, the current closure represents an actual, substantial disruption to oil supplies.

Quantifying the Economic Impact: Federal Reserve Research

Recent research from the Federal Reserve Bank of Dallas models the impact of geopolitically driven oil production shortfalls on oil prices and global economic fluctuations. The model accounts for the rarity of such events and the time-varying probability of their occurrence. Even the anticipation of a disruption can lead to price surges and economic contraction, regardless of whether the event materializes.

Assuming a complete shutdown of the Strait of Hormuz during the second quarter of 2026, with a declining probability of continued closure in subsequent quarters, the model predicts the following:

• Oil Prices: An average West Texas Intermediate (WTI) price of $98 per barrel in the second quarter of 2026.
• Global GDP Growth: A decrease in annualized global real GDP growth by 2.9 percentage points in the second quarter of 2026.

The subsequent effects depend on the duration of the closure:

• One-Quarter Closure: Oil prices fall to $68 per barrel in the third quarter of 2026, with growth increasing 2.2 percentage points. However, real GDP remains 0.2 percent below its pre-closure level by year-end 2026.
• Two-Quarter Closure: Oil prices rise to $115 per barrel in the third quarter of 2026 before falling to $76 per barrel in the fourth quarter. Positive growth doesn’t return until the fourth quarter.
• Three-Quarter Closure: Oil prices peak at $132 per barrel by year-end, with negative growth persisting through the end of 2026. Global real GDP growth could fall by 1.3 percentage points.

These projections are based on a 20 percent shortfall in global oil supplies. Reducing this shortfall to 10 percent would lessen the impact on global real GDP growth to -1.6 percentage points.

Potential Mitigation Strategies

Several strategies could potentially alleviate the oil supply shortfall:

• Saudi Arabia Pipeline: Increasing oil flow through the East-West pipeline from the Persian Gulf to the Red Sea could redirect approximately 4 million barrels per day, representing one-fifth of the global shortfall. However, this route is vulnerable to attacks.
• UAE Pipeline: Utilizing the pipeline bypassing the Strait of Hormuz to the port of Fujairah, though currently facing attacks.
• Negotiated Transit: Negotiating agreements with Iran to allow oil tankers to pass through the Strait, as India has reportedly done.
• Resumption in a Hostile Environment: Continuing oil traffic despite the risk of attacks, similar to the Tanker War of the 1980s, as long as losses remain sustainable.

Implications for U.S. Economic Growth

Due to the shale oil boom and a near-balanced petroleum trade balance, the impact on U.S. GDP growth is expected to be similar in magnitude to the global effects.

Conclusion

The closure of the Strait of Hormuz presents a significant threat to the global economy. While the duration of the closure remains uncertain, the potential for substantial oil price increases and economic contraction is real. Reducing the oil supply shortfall through mitigation strategies is crucial to dampening the impact. The situation remains fluid, and ongoing monitoring of geopolitical developments and oil market dynamics is essential.