This week, the Organization for Economic Cooperation and Development estimated that, even if the United States and Iran soon reach a permanent ceasefire agreement, worldwide economic growth will continue to suffer at least into 2027, and perhaps beyond. It predicts that inflation will remain well above expected levels, too. The war, which has led to the closure of the Strait of Hormuz, has disrupted the flow of global energy supplies. Countries in Asia, which are highly reliant on oil and gas that comes from the Middle East, have been particularly affected.

I recently spoke by phone with Peter Harrell, a non-resident fellow at the Carnegie Endowment for International Peace and an expert in trade and economic policy, to try to understand how the war may affect the global economy in the short and long term. Harrell is also a visiting scholar at Georgetown’s Institute for International Economic Law. During our conversation, which has been edited for length and clarity, we discussed why Trump has been able to convince markets that a peace deal is imminent, how much worse things could get without a quick deal, and the places around the world where the war has caused the most damage.

What has been the biggest economic impact of the war, and in what ways is this impact different, or not, from what you were anticipating several months ago?

In terms of what might have been predicted versus where we are, I think one area that I have to unequivocally give Trump and his Administration some credit is their ability to jawbone the markets. We have clearly seen a rise in oil prices. It was up fifty per cent, and it’s still up thirty per cent. We’re clearly seeing impacts on fertilizer prices, on food prices, on inflation. If you are in the developing world, you’re seeing, depending on where you are, physical shortages of energy, and the government trying to tell you to drive less, that sort of thing.

On the other hand, we have not seen the catastrophic outcomes of a hundred and fifty or a hundred and eighty dollars a barrel of oil that I think many of us, frankly, would have predicted, back in February, if we had thought that the Strait of Hormuz was going to be closed for more than three months. Trump goes out there and jawbones. He says that it’s ending soon, and the market buys it, and as a result the price impacts, though undeniably quite serious, really haven’t materialized as badly as most of us would have predicted.

I’ve noticed this, too. It seems as though every other day you read the Times or the Wall Street Journal and they say, basically, that energy prices have fallen because Trump made some sort of statement about a deal being on the horizon, and you start to wonder if the people who are making markets move have paid attention to politics since 2015. How do you understand it?

Maybe it’s an irrational response, maybe it’s a rational response. But if I want to treat it as a rational reaction, the way I understand it is that when we entered this conflict, at the end of February, there were more than a billion barrels of stored reserve oil around the world. You had a few hundred million barrels in the U.S., with the Strategic Petroleum Reserve, but there are also lots of private-sector reserves out there. Oil companies have buffers. China actually had a very large reserve of oil. In Japan and South Korea, it’s not just the governments that have reserves but private companies have some, too.

And I think the dynamic we’re seeing, and you can see it over the last couple of months, is that the levels in these reserves have gone off a cliff because people are drawing them down. And I think that what might be going on, if this is rational, is if you think the war is going to end in another two or three weeks it actually just makes sense to pull some of the oil out of your reserves, out of your stockpiles, because you have them, and that’s what they’re for, rather than paying higher prices. What Trump has been able to do by promising the rapid end of the war is to get folks with reserves to just draw down reserves rather than taking more drastic actions to conserve oil or bid up the price even more.

But now, by all accounts, we are reaching the end of that. We don’t really know where China is. China had been packing oil into its reserves last year, or probably over the last two years. And one thing that has happened that has kept prices relatively stable is that, every day, they’ve been buying several million barrels less oil on global markets than they had last year, and they’re clearly doing that by drawing down reserves. But it’s fairly opaque, so we don’t really know how much they have.

Certainly, in the West, you can see that the reserves have fallen off a cliff, and are at their lowest level in years. We are reaching the end of our ability to draw down those reserves, and so I do think that, if Trump doesn’t actually figure out how to end the war in the next month or so, we are going to see another huge price spike.

If the war ends this month, it seems likely that we will see lower economic growth for the next year or so. We’re also going to see higher inflation. How are you thinking about these impacts?

So, in this scenario, where it ends quickly and we avoid the worst cases, we will probably lose about half a point of global G.D.P. growth. Global growth was expected to be roughly three per cent, and it will likely fall to around 2.5 per cent. That is something, but that’s nothing like the 2008-09 financial crisis, where the drop was more than one per cent, or COVID, where the drop was more than three per cent, right? It’s a hit, but not a debilitating hit. Clearly, the farming sector, both in the U.S. and globally, is taking a particular hit. And this is because agriculture is affected on both ends. Agriculture is very energy-intensive, and also needs a lot of transportation. Aside from the energy shock, the ag sector is also feeling the fertilizer shock. About a third of the world’s nitrogen-based fertilizer was going through the strait. Fertilizer prices for nitrogen-based fertilizer are up forty to fifty per cent, and others are up at least twenty per cent. So you’re seeing both your transport and your energy costs go up, and your fertilizer costs, too. That pinch is going to manifest in the back half of the year and into 2027, into global commodity-food prices, because one thing that’s happening, especially in the developing world, is that we are seeing less food go into the ground. Look at Southeast Asia, or elsewhere—there’s less rice planting because the economics don’t make sense right now. So you are probably going to see continued higher food prices for six to twelve months or more on the back end of this, because of that decline in planting.

And then the other thing is inflation, which is running hotter than it was. And I think the odds of reducing interest rates have now gone down. Inflation for April ticked up to 3.8 per cent on an annual basis, which is the highest since early 2023, and nearly twice the Fed’s stated target of two per cent. The reality is that that elevated inflation rate is going to make it harder for the new Fed chair, Kevin Warsh, to cut interest rates the way Trump wants him to, since lowering rates in a higher-inflation environment would probably just make inflation worse.

We’re also seeing mortgage rates tick up, so, at least for the second half of this year, whether you’re buying a house or a car, or you’re a corporation looking to borrow for your data center, the financing costs are definitely going to remain elevated. That’s going to affect a whole bunch of different industries. It will not be as acute as we’re seeing in the ag sector, which is, I think, really bearing the brunt of this—as well as aviation—but I think the costs will have a tail.

Does the belief that the economic impact will stay with us after the strait is opened also have to do with things that we aren’t totally sure about—for example, damage to energy networks in the region?

Iran, especially earlier in the war—less so in the last month, when we’ve had these more tit-for-tat strikes—was targeting energy infrastructure. They were targeting pipelines. They were targeting oil fields to some degree, and, because oil has largely not been able to get out of the strait, some of the Middle Eastern producers have had to shut down or slow down production because they don’t have a place to put it anymore. It’s going to take some time for crude oil to come back on. Now, that’s probably a matter of months, or weeks to months, rather than years. And the damage to the crude sector, by all accounts, is not outrageously severe, so, again, I think if we can get the strait open we can get things moving again, and we’re probably not going to see a particularly bad lag on the resumption of crude.

I worry more about liquid natural gas. Qatar is a huge L.N.G. producer, and they have had to slow down production. You run these enormously complicated facilities to liquefy it and cool it, and I think resuming that is going to take some time.

This could have some bad implications for Europe this winter. Europe likes to build up supplies for gas in the summer and fall, when they’re not using as much, and then draw it down over the winter. And, after the Russia-Ukraine war, Europe turned principally to the Middle East for gas, as well as to the U.S, and if the gas can’t get back online Europe could be in trouble, and might have to make a decision about whether they are going to get through a winter with relatively low reserves and just pray it’s not a cold one. Or they are going to have to start thinking about slowing down industrial production to save gas, or get back to maybe buying some more gas from Russia, which they really don’t want to do, for obvious reasons.

I will say though, that while this has been a disaster, and has not been great for the global economy, if I was going to talk about the one upside—and certainly not one the Trump Administration would appreciate—it would be that, by blundering into this protracted war, Trump is spurring a substantial global impetus to move forward with a green-energy transition.

What are examples of that?

China’s E.V. exports in April—the most recent month available—jumped forty per cent compared to a year earlier, with sales booming basically everywhere except North America, where tariffs and other restrictions block most Chinese E.V.s. China’s solar exports in April are up sixty per cent over 2025, as countries decide that they are tired of dealing with unpredictable oil and gas prices. You see huge booms in solar and E.V. production in parts of South Asia, Indonesia, Sri Lanka. We in America have felt this energy hit as a price impact, but other countries that were more directly reliant on oil from the Persian Gulf have felt this as a supply impact. You have countries in East Asia and South Asia that have had to tell government offices to move to Zoom a couple days a week because they’re trying to avoid burning gasoline. This war has made cheap Chinese solar and battery and E.V.s look all the more attractive, as a way to just not have to worry as much about your energy bill going forward. In the nineteen-seventies, with the oil shock, you saw the U.S. and Western Europe decide that they needed to have hydrocarbon reserves. They built up the Strategic Petroleum Reserve.

In the short term, emerging markets are burning more coal, but over the mid- to long term I think there is a growing chance that you see a number of those countries say that they really need to move as quickly as possible to diversify the energy they can produce at home, even if it means buying Chinese equipment.

But they are using more coal now?

Yeah, in the short run, you’ve definitely seen countries fire up coal plants that had not been active, or delay plans to shut them down.

Why has Asia been hit so hard by this crisis? Is it just proximity-based reliance on the Middle East for energy?

That is mostly it. Obviously South Asia in particular is proximate to the Middle East. Also, a bunch of the economies in South and East Asia tend not to have a ton of hydrocarbon-energy resources of their own. South Korea or Japan, other than nuclear, do not have a lot of indigenous sorts of energy production, and so they are relatively more exposed to energy imports. They both import a larger percentage than North America and parts of Western Europe do, and a higher share of what they import, because of the geography, is coming out of the Middle East.

You mentioned that things could get much worse. What are your biggest concerns if a deal is not reached in the next several weeks? Are there different time frames you are running through in your mind?

If you just look at the drawdowns in stockpiles, you can see, as I said, that strategic reserves are at the lowest level in a couple of decades across the aggregate Western private and public reserves. We talked about how it may take time to bring things online. The flip side of that is, there are loaded tankers in the Persian Gulf that are ready to go. So, if you get the strait open, there will actually be some energy coming out reasonably quickly, which then buys time to try to bring some of the production back online.

But, if this doesn’t get resolved in the next month or so, I think you could easily see oil going up forty or fifty dollars a barrel in quite short order, because we’ve drawn through the reserves, and at some point there’s going to have to be that price response. That price shock is then going to carry forward into transportation costs and all the rest, in terms of inflation and higher interest rates. I picture what we have seen over the last couple of months, but doubled, if things don’t change soon. And the knock-on effects will get worse.

Although, on one level, this has maybe been less catastrophic than we thought it could be, I’m trying to keep in mind the fact that people in places like Somalia are having trouble feeding their families because of this war.

Yeah, that’s something that I think is important. It is easy for me, sitting here on the East Coast, at a university, to complain about the fact that gas prices are a little bit higher, and that interest rates are a little bit higher. But if you’re already living on two dollars a day and your food price goes up by twenty per cent, or your fertilizer price for your back-yard garden goes up by twenty per cent, that means real trade-offs. There are more than one billion people around the world who are living in that situation, and they feel this much more directly than I think, frankly, most of us. I don’t mean to minimize what we clearly do feel in the United States, but we actually have not borne the brunt of this the way some folks have. ♦