The effects of the war with Iran are evident to most Americans: gasoline prices have remained above $4 for several weeks, mortgage rates are rising towards 7%, and companies are adding transportation surcharges to offset the record costs of diesel.
These increases in the cost of living have lasted longer than the Trump administration had stated they would, although ultimately, they should reverse if and when the United States and Iran reach a ceasefire agreement.
However, other economic changes will not be as easily reversed. The war has altered the global economy, reshaping the way the world does business, writes CNN.
Iran Controls the Strait of Hormuz
Before the war, ships flying the flag of any country could freely transit the Strait of Hormuz to transport and deliver goods to and from the Middle East. A fifth of the world's oil passed daily through this narrow maritime route.
The idea of who controls the strait has permanently shifted after the United States and Israel attacked Iran at the end of February. Iran declared that the strait belongs to it and that it decides on its control and attacked ships attempting to enter or exit the Persian Gulf. The effective closure of the strait has given Iran an economic leverage over the United States and its Gulf state allies, removing 13 million barrels of oil per day from the global economy.
In May, Iran changed its tactics. Instead of attempting to close the strait, it began regulating its use. It established the Authority of the Persian Gulf Strait and started requiring transit ships to register with this organization, follow an authorized navigation route, and pay a fee for passage.
After signing a Memorandum of Understanding with the United States in June, Iran agreed not to charge fees for 60 days, but continued to attack transit ships that did not register with the authority.
After practically abandoning the memorandum of understanding, the US military began coordinating and escorting "dark" transits, conducted at night, through the strait to increase oil exports from the Persian Gulf and avoid Iranian drone attacks. The operation worked, but the need for such a broad, demanding, and costly action demonstrates how much influence Iran has gained over the Strait of Hormuz.
“It seems likely that Iran will emerge from the war with a stronger position regarding strait control, forcing oil-dependent countries in the Middle East to adapt,” said Ross Mayfield, an investment strategist at Baird. “The closure of the strait has shifted from a hypothetical, ultimate risk to a demonstrated and effective tactic.”
Oil market analysts believe that resolving the conflict could ultimately involve a certain type of agreement allowing Iran to charge fees for safe passage through the strait. Some critics fear this could set a precedent for other countries to charge vessels transiting international waterways.
However, such a precedent already exists, noted Natasha Kaneva, head of commodity research at JPMorgan. The United Nations allows countries to charge fees for services - not just for transit on waterways, but for navigation safety, traffic management, security escorts, emergency interventions, and environmental protection. Turkey, Denmark, Sweden, Russia, and Indonesia all charge fees for services provided to vessels transiting various straits, Kaneva emphasized.
The change could add approximately $1 to the price of oil if Iran adopts a fee system similar to Turkey's for the Turkish straits, Kaneva said. A very large oil tanker could pay around $260,000 for a round trip crossing.
China Strengthens Its Role as a Major Power in the Oil Market
China does not produce a lot of oil, but it has demonstrated that it is the most powerful force in the oil market during the war with Iran.
This is because China has shown a unique ability to adjust its demand, said Joe Brusuelas, chief economist at RSM US.
China's strong dependence on the huge oil reserves it had accumulated before the war dramatically reduced the country's oil imports by about 5 million barrels per day. At some point, China will need to replenish its reserves, and demand will rise again.
However, some changes in Chinese consumer behavior will become permanent.
For example, during the five-day Labor Day holiday in May, the charging of electric vehicles on China's highways increased by 55.6% compared to the previous year, according to China's Ministry of Transport. Throughout the holiday, just under a quarter of the vehicles on China's highways were electric - 33% more than the year before.
China has also quickly shifted from oil and gas power plants to coal, demonstrating unprecedented resilience in the face of an unprecedented oil shock.
Oil demand plummeted during the war - much more than oil industry analysts had expected - demonstrating that the world is much more flexible in its use of oil than previously believed.
Out of the 1.9 billion barrels of Middle Eastern oil that disappeared from the market during the war, 800 million barrels - just under half - were offset by people and companies consuming less oil, according to JPMorgan.
It is not clear how much of this flexibility is permanent and how much is temporary. However, permanent declines in oil consumption, even just in China, could reduce demand enough that it never fully recovers. We may have reached the peak of the oil era.
“History suggests that past oil shocks have often left behind lasting declines in gasoline demand, and this episode may prove different,” Kaneva said.
Production Outside the Middle East Has Increased
Another significant adjustment during the war with Iran was the increase in oil production from unexpected sources.
Exploration and development of alternative energy sources outside the Middle East are intensifying, noted Andy Lipow, president of Lipow Oil Associates. And existing oil projects are ramping up their drilling pace: Brazil increased its oil production by 800,000 barrels per day. Guyana added 300,000 barrels, Canada 200,000, and Norway 150,000, according to JPMorgan.
And the United States, which initially opposed increasing production for fear of being negatively affected by a temporary rise in oil prices, now produces 900,000 more barrels per day than in the same period last year.
Most of the US production increase comes from platforms operated by private companies, delivering oil to refineries for aviation fuel and natural gas for the European market, where reserves are declining. US production could slightly decrease after the full reopening of the Strait of Hormuz, but JPMorgan expects US production to remain close to current levels.
Brazil surprised oil analysts by producing much more than previously thought possible at this stage, but its solid execution of oil projects is likely to lead to even higher production. And a new offshore production vessel arriving this month off the coast of Guyana will help the country accelerate production from its massive field.
To compensate, Middle Eastern producers are changing how they transport oil, developing alternative routes. Saudi Arabia has engaged massive truck convoys to transport goods through the country to the Red Sea and has used its East-West pipeline at full capacity to bypass the strait. Iraq is in talks with Chevron about building a pipeline to the Mediterranean.
Meanwhile, OPEC is fighting for its own survival after the United Arab Emirates, one of the organization's most important members, announced in April that they would leave the group.
Iraq, the second-largest oil producer in the bloc, is reportedly the next member that could leave - the country's Oil Minister told Bloomberg that Iraq will have to decide whether to remain in OPEC if production targets do not increase dramatically.
Iraq seeks permission to produce a record level of 5 million barrels per day after the war, with a long-term goal of reaching up to 7 million barrels per day, Bloomberg reported.
This could force Saudi Arabia to allow other countries to produce more oil than the world needs. This could be beneficial for consumer prices, pushing them down. But it could also create a permanent surplus of oil, dramatically reducing oil industry profits.