Consider the impact on oil markets of the US-Israeli on-again, off-again war against Iran. Although they have been highly volatile since the war began, their fluctuations have reflected changing perceptions and expectations rather than demand and supply—often shaped by Trump’s social media posts. Certainly, Iran’s closure of the Strait of Hormuz disrupted global oil supplies. But shipping distances and transportation delays meant its impact was not immediately felt by consumers and producers. Nevertheless, oil and gas prices fluctuated wildly as contradictory official announcements repeatedly changed market expectations. By the beginning of July, following a preliminary ceasefire agreement between the US and Iran, crude was trading below $70 a barrel – roughly the same level as it was in February, before the war broke out. Even with the resumption of fighting, prices have so far increased only marginally. Despite volatility in global energy prices, US stock markets recorded their best quarter since 2020 between April and June and continued to rise in early July. The rally was led by AI stocks, fueled by the belief that AI will deliver unprecedented gains in productivity and economic growth. To some extent, this reflects the relatively limited impact of the war on economic activity in rich countries. The IMF forecasts a slight slowdown in the GDP growth of developed economies, to 1.7%. Whereas America is expected to grow at the rate of 2.3%. Across OECD economies, the unemployment rate stood at 5% in April, almost unchanged from February 2022. This resilience of developed economies can be largely attributed to the recent surge in AI and cryptocurrency investments. Several Asian economies – notably China, Taiwan, South Korea and Malaysia – have also benefited. The current complacency of financial markets is reinforced by the widespread perception that the war with Iran is effectively over despite aggression by both sides, or that it will simply continue as a low-intensity conflict, allowing partial transit through the Strait of Hormuz. Yet this confidence ignores the long-term economic consequences of war. Despite the ceasefire, oil exports from the Gulf remained well below pre-war levels. And even if exports fully recover, low-income countries will continue to bear the costs of today’s energy crisis for years to come. The most economically important petroleum by-products include fertilizers, which are important for agriculture. The Food and Agriculture Organization of the United Nations estimates that global fertilizer prices will increase by 15-20% in the first half of 2026. As a result, farmers—especially in low-income countries—will have to contend with rising fertilizer prices as well as higher fuel costs for irrigation and transportation. Even a slight reduction in fertilizer use can lead to a huge decline in crop production. The World Bank estimates that the per capita income gap between developed and developing economies, except China and India, will not return to pre-pandemic levels until after 2028. The per capita income gap between developed and developing economies will not return to pre-pandemic levels until after 2028. Many countries in the Global South have lost an entire decade to war. (@ProjectSyndicate)
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Jayati Ghosh’s column: Many countries have gone back a decade due to a few months of war
