The ongoing US war against Iran and the subsequent crisis surrounding the Strait of Hormuz provide a useful opportunity to understand one of the most important yet often least understood realities of the modern economy, explains Nigerian professor Abdullahi Danlandi in an article.
Side effects of war travel at incredible speed
War is not confined to the battlefield. It travels through markets, supply chains, currencies, factories, and ultimately reaches the pockets and dining tables of ordinary people. One does not need to be an economist to comprehend this phenomenon. At its core, it is simply a story about scarcity, fear, expectations, and the interconnectedness of the modern world. The Strait of Hormuz is particularly critical because it serves as one of the world's most vital petroleum gateways. A significant portion of globally traded oil—approximately 20 percent—normally passes through this relatively narrow waterway. Consequently, when aggression threatens the free movement of tankers through Hormuz, the immediate economic question is not necessarily whether the world has suddenly run out of oil. Clearly, massive quantities of petroleum remain beneath the ground across the region. The problem is that oil which cannot be efficiently transported to the international market is, for practical economic purposes, temporarily unavailable to those who need it.
The bridge analogy
A common analogy makes this easier to understand. Imagine a major city supplied with food via a single large bridge. Farms outside the city continue producing food and warehouses remain full, but the bridge suddenly becomes inaccessible. The food has not disappeared. Nevertheless, people inside the city begin worrying about imminent shortages. Traders start purchasing whatever supplies they can find, consumers buy more than they normally would, and sellers begin raising prices.
Disruption of transit from producer to consumer
The economic problem, therefore, is not merely the physical absence of the commodity... it is the disruption of its transit from producer to consumer. This is essentially what occurs during an oil crisis. Petroleum is a globally traded good whose price is determined not only by existing volume, but also by expected availability, location, transit security, and replacement costs. When the Strait of Hormuz is threatened or closed, the international oil market immediately confronts a daunting question: How much oil might be unavailable, and for how long? The answer need not be known with certainty before prices react.
Fear holds tangible economic value
Markets are driven not only by facts but also by expectations of future events. This is precisely why fear holds economic value in itself. If traders believe a disruption will last only a few days, the price reaction may remain relatively muted. However, if they suspect the disruption could persist for weeks or months, they begin pricing the likelihood of a far greater shortage into today's market.
An oil trader does not purchase crude oil based solely on present conditions. They also calculate what the price and availability of crude will be tomorrow. Thus, anticipatory sentiment can produce real economic consequences before an expected event actually occurs. This principle explains why oil prices can surge dramatically even while gas stations still sell fuel and oil-producing nations continue pumping crude. The market does not merely ask, "How much oil is available today?" It asks, "How secure is tomorrow's supply?" If the answer becomes uncertain, prices escalate. In this sense, the oil market is not just a marketplace for physical goods... it is also a market for risk and confidence.
Oil as the engine of modern economic life
The ramifications become far more severe when we realize that oil is not merely a product used to power automobiles. It is one of the fundamental inputs of modern economic life. Fuel is required to transport agricultural yield, operate machinery, move raw materials, distribute manufactured goods, and connect producers with consumers. Consequently, an increase in the price of crude oil can trigger a chain reaction across the entire global economy. As crude becomes more expensive, refined petroleum products cost more, transportation grows pricier, production and distribution costs rise, businesses raise retail prices, and ultimately consumers find that the same amount of money buys fewer goods and services.
The example of bread
Consider something as basic as a loaf of bread. There may be no visible fuel inside the bread itself, yet oil has almost certainly impacted its price. Fuel was required to deliver agricultural inputs to the farm. Machinery needed fuel for cultivation or harvesting. Agricultural produce had to be transported to a processing facility. The processed material had to be moved to the bakery. The bakery itself requires energy, and the finished loaf must ultimately be transported to the market or grocery store. At every single stage, energy costs and transport fees are factored into the end price. Thus, when fuel prices rise, the price of bread can increase even if the quantity of wheat, flour, or yeast remains completely unchanged.
The deeper meaning of cost-push inflation
This is the deeper concept behind cost-push inflation. Inflation does not always stem from consumers suddenly wanting to purchase more goods. Sometimes it arises because the cost of producing and delivering those goods has escalated. An oil shock represents one of the classic mechanisms through which such inflation manifests. Higher energy expenses become embedded within the economy's cost structure and progressively filter down from manufacturers to wholesalers, retailers, and ultimately consumers. The impact can prove exceptionally harsh in developing economies, where transportation represents a substantial component of everyday product pricing. When the cost of hauling food from rural farms to urban centers climbs, city consumers pay more. When transporting raw materials to factories grows more expensive, finished goods become pricier. Faced with rising operational costs, businesses may curtail production, hike prices, or lay off workers. Consequently, an external geopolitical crisis can transform into an internal social and economic emergency.
Why citizens of oil-producing nations suffer too
There is also a apparent paradox here regarding oil-producing countries. One might reasonably ask: If Nigeria produces oil, why should Nigerians suffer when global oil prices skyrocket? The answer lies within the architecture of the global oil market. Crude petroleum is an internationally traded commodity whose valuation is dictated by global market forces. An oil-producing nation may therefore reap higher crude export revenues while its citizens simultaneously suffer from elevated domestic energy costs and transportation fees. The government may earn more from oil exports while households experience a sharp decline in purchasing power. The very same oil shock can thus represent a financial windfall for the state and an economic burden for the citizen.
The economics of warfare
There is an even deeper dimension to this phenomenon. The economics of war demonstrate that modern national economies are profoundly interconnected. The world no longer consists of isolated national economies. A disruption at a single strategic geographic node can impact production, transport, inflation, exchange rates, and consumer prices thousands of miles away. This interconnectedness has delivered immense economic benefits to humanity, but it has also created severe vulnerabilities. The same globalization that allows countries to source goods cheaply from distant corners of the planet means that a crisis in one region can transmit economic pain across entire continents.
Critical artery of the global energy system
Therefore, the Strait of Hormuz represents far more than a mere geographic passage between the Persian Gulf and the open ocean. From an economic standpoint, it serves as a critical artery of the global energy system. To understand its importance, one can picture a multi-lane highway carrying a vast percentage of world commercial traffic. If that highway is suddenly blocked, alternative routes may exist, but they lack the capacity to handle the same volume of traffic. The result is congestion, delays, higher transport costs, and localized scarcity. In the oil market, alternative pipelines and detours can absorb some displaced supplies, but they cannot fully substitute for the massive volume that normally moves through Hormuz.
Strategic petroleum reserves
This is also why strategic petroleum reserves become vital during a crisis. Governments maintain emergency stockpiles partly to insulate the economy from temporary disruptions. They function much like a household storing food in anticipation of a potential shortage. If regular supply is interrupted, stored reserves can temporarily offset the deficit. However, stockpiles are finite. They can buy time... but they cannot permanently eradicate scarcity. If a major disruption continues for an extended period, the underlying problem inevitably resurfaces.
Consumers notice the pump price surge
An ordinary consumer might wonder why gas prices increase when there is still fuel at the local gas station. The answer is that present pricing is driven by the anticipated cost of replacing current inventory tomorrow. A gas station operator selling fuel today must eventually replenish their tanks. If the expected replacement cost has risen significantly, selling today's product at yesterday's price could mean operating below the acquisition cost of tomorrow's delivery. Thus, the price mechanism responds to future expectations long before physical shortages become visible to the retail consumer. This demonstrates one of the fundamental tenets of economics: prices are signals. A rising price alerts producers that a commodity has become relatively scarce or dangerous to acquire, while simultaneously signaling to consumers that they should conserve usage. Theoretically, this mechanism encourages producers to seek alternative supplies and consumers to reduce consumption. In practice, however, the adjustment process can be painful, particularly for low-income households that cannot easily reduce their usage of essential goods. A wealthy household might absorb higher transport expenses with minimal friction. A struggling family already allocating most of its income to food and commute costs has virtually no room to adjust.
War economics as a matter of social justice
This is where war economics turns into an issue of social justice. The burden of an unprovoked war across the sea is rarely distributed equally. Those with wealth, savings, and diversified income streams are generally better positioned to endure inflationary shocks. Impoverished households, wage earners, and small businesses often suffer disproportionately because basic necessities like food, transit, and household energy consume a far larger percentage of their income. Inflation is therefore not merely an abstract economic statistic. It can become a mechanism through which the social fallout of war is transferred from the battlefield onto vulnerable populations.
The risk of a vicious cycle
Higher oil prices increase production and transit costs. Elevated production costs drive up retail prices. Surging prices erode consumer purchasing power. Workers then demand higher wages to offset the rising cost of living. Businesses facing higher payroll and energy expenses may hike prices once more or cut back on production and employment. Consequently, overall economic activity can weaken at the exact moment prices are accelerating. When high inflation begins coexisting with sluggish economic growth and rising unemployment, economists describe the condition as stagflation—one of the most difficult challenges for policy makers to manage.
War is an economic shock
The deeper lesson, therefore, is that the economics of war extend far beyond defense spending, infrastructure destruction, or hardware procurement. War is fundamentally a massive economic shock. It disrupts supply, amplifies uncertainty, inflates transit and energy costs, distorts investment decisions, and weakens consumer purchasing power. Missiles may land in one specific country, but their financial reverberations ripple through international markets until they manifest as higher bus fares in African cities, a pricier loaf of bread, an elevated electricity bill, or smaller food portions in a household shopping basket. The crisis surrounding the Strait of Hormuz, arising from US aggression and naval piracy, provides a stark illustration of the hidden architecture of the modern economy. Beneath the seemingly simple act of buying a loaf of bread, boarding a bus, or filling a vehicle with gasoline lies a vast international network encompassing crude oil, refineries, shipping lanes, insurance policies, foreign currencies, transport hubs, factories, farmers, merchants, and end consumers. When a crucial link in that chain is severely disrupted, the fallout cascades through the entire system. This is why the economics of war can be summarized in a single sentence: when conflict halts the flow of vital resources, scarcity and uncertainty mount... when scarcity and uncertainty mount, prices escalate... and when prices escalate, the economic consequences ultimately reach everyday people. The tragedy is that those who pay the economic price are rarely the ones who made the decision to go to war. A missile may be launched by warmongers in the US, but its economic echo is ultimately felt in the open markets of an ordinary African or Asian town.
www.bankingnews.gr
Σχόλια αναγνωστών