Summary and Key Points: The Strait of Hormuz has been shut since the war began in February. Iran has walked away from talks, and economists are modeling what would happen if it remains closed in October. Their answer drifts toward a word they almost never use — depression.
-And the warning is already here, hiding in plain sight: the calm oil price on the screen isn’t what importers actually pay, and there’s a single number that, if it holds, tips the world past its breaking point.
President Donald Trump delivers the Commencement address at the graduation ceremony for the University of Alabama, Thursday, May 1, 2025, at Coleman Coliseum in Tuscaloosa, Alabama. (Official White House Photo by Daniel Torok)
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If Iran Holds The Strait Of Hormuz Shut Until October, The World Could Be Staring At A Depression-Level Shock
The Strait of Hormuz has been effectively closed since the war with Iran erupted on February 28, and as of today, there is no deal to reopen it.
Iran has walked away from talks and threatened to permanently seal the waterway. So it is worth asking the question that economists have been modeling with growing alarm: what happens if the blockade is still in place when the calendar turns to October?
The honest answer is that the longer this runs, the closer the global economy drifts toward the kind of shock that not only slows growth but breaks it.
The Hole In The World’s Oil Supply
This is a problem that just keeps getting worse. The strait normally carries close to 20 percent of the world’s oil and a comparable share of its liquefied natural gas, and the closure has already produced the largest supply disruption in decades.
By April, global oil output had fallen by 12.8 million barrels per day since February, with production from the Gulf countries affected by the closure running more than 14 million barrels a day below pre-war levels. The World Bank described the result as oil’s largest quarterly decline since the pandemic, and unlike the pandemic, there is no quick supply-side fix, because the barrels are trapped behind a chokepoint rather than sitting idle in storage.
The price response has been violent and is masked by a misleadingly calm headline number. Futures markets have repeatedly drifted back toward the high $90s on hopes of a deal, but the physical market, the price importers actually pay for delivered crude, has run far higher.
In mid-April, even as Brent futures sat near $97, the price of physically delivered crude stood at around $132 a barrel. That gap is the market pricing in the difference between hope and reality, and a strait still closed in October would collapse that gap in the wrong direction.
What The Models Say A Long Closure Does
The economic forecasting establishment has converged on a grim range, and the severity scales directly with duration.
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The Federal Reserve Bank of Dallas modeled a closure removing close to 20 percent of global supply and found it would push oil prices sharply higher and lower global real GDP growth by an annualized 2.9 percentage points in a single quarter. That is the kind of hit that turns growth negative across much of the developed world.
The longer the closure runs, the worse the cumulative damage. One detailed cost model estimated that a prolonged closure would inflict trillions in global economic losses, more than four percent of world output, with a full-escalation scenario reaching toward six percent of global GDP.
A blow of that magnitude, sustained, is not a recession in the ordinary sense. It is in the territory that economists reserve for the word depression, a contraction deep and broad enough to reorder the global economy rather than merely dent it.
The Breaking Point
The single most important number to watch between now and October is the sustained price of oil, because there is a level at which the damage stops being linear and starts cascading.
Oxford Economics identified that threshold, modeling a scenario in which oil averages $140 a barrel for a sustained stretch and calling it a breaking point for the world economy.
At that level, they found, the eurozone, the United Kingdom, and Japan would all be pushed into outright contraction, and the United States would grind to an economic standstill. The reason is that at high enough prices, the damage stops being confined to the gas pump and starts tightening financial conditions across the board, draining credit and confidence from every corner of the economy at once.
Aircraft Carrier USS Nimitz Coming Home. Image Credit: Creative Commons.
A strait still closed in October is precisely the path to sustaining prices at or above that breaking point. The physical market is already flashing $132. The relief valves that have kept futures lower, the hope of a negotiated reopening, and the steady drawdown of emergency reserves all have expiration dates.
Iran’s move to abandon talks removes the first. The relentless pace at which the United States and other consumers have drained their strategic stockpiles removes the second, because those reserves are finite, and a closure lasting into the autumn would run them toward their floors. Strip away both cushions, and the physical price becomes the market price.
Why Even A Resilient America Cannot Escape
There is a comforting story told in Washington that the United States, as the world’s largest oil producer, is insulated from a Hormuz shock. It is half true and dangerously misleading. American domestic production cushions the blow relative to import-dependent economies, but oil trades in a single global market, and the price set in the Persian Gulf is the price Americans pay regardless of where their own barrels come from.
Goldman Sachs, which called the closure the largest supply shock in the history of the global crude market, found that even a relatively contained disruption would raise inflation and trim growth enough to push its U.S. recession odds to 30 percent. Extend the scenario to a closure that lasts into October at breaking-point prices, and the insulation thins to nothing.
The countries that would suffer first and worst are not the United States but the import-dependent economies with no domestic cushion at all. The most exposed nations combine heavy reliance on Gulf crude with limited alternatives, and developing economies would face the compounding blows of falling stock prices, weakening currencies, and a rising cost of external debt as capital flees to safety.
A sustained shock would hit them as a full-blown crisis well before the developed world tipped into recession.
The Iran War and The Uncertain Future
The path from here to October is not fixed. A genuine ceasefire that reopens the strait would deflate the physical premium quickly and pull the world back from the edge. But that path now runs through a Tehran that has said it is done talking, and every week the closure persists, the reserves drain further, the physical premium hardens into the headline price, and the breaking-point scenario shifts from a tail risk to a base case.
The question is no longer whether a closed Strait of Hormuz can damage the global economy. It is whether the world can find an off-ramp before the damage becomes the kind of history that gives a worse name than recession.
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About the Author: Harry J. Kazianis
Harry J. Kazianis (@Grecianformula) was the former Senior Director of National Security Affairs at the Center for the National Interest (CFTNI), a foreign policy think tank founded by Richard Nixon based in Washington, DC. Harry has over a decade of experience in think tanks and national security publishing. His ideas have been published in the NY Times, The Washington Post, The Wall Street Journal, CNN, and many other outlets worldwide. He has held positions at CSIS, the Heritage Foundation, the University of Nottingham, and several other institutions related to national security research and studies. He is the former Executive Editor of the National Interest and the Diplomat. He holds a Master’s degree focusing on international affairs from Harvard University.
