Rising tensions in the Middle East could soon be felt at the gas pump as the Israel-Iran conflict escalates. Americans may not be able to escape the economic impact of turmoil thousands of miles away, and possible impacts look grim for consumers.
1900s U.S. and Foreign Involvement in Iran
Iran and the United States’ bitter relationship kicked off in 1953 when the Central Intelligence Agency (CIA) and the British Secret Intelligence Service directly intervened in Iran’s government. The two agencies combined their resources in order to stage a coup to overthrow Iran’s democratically elected prime minister, Mohammad Mossadeq, who nationalized Iran’s oil industry.
Over four days, Kermit Roosevelt Jr., grandson of former President Theodore Roosevelt, orchestrated two attempts to destabilize Iran’s government, fundamentally altering the relationship between the two countries. Once Mohammad Mossadeq and the democratic government were destabilized, foreign forces reinstalled the Iranian monarchy.
Under U.S. and UK pressure, the shah signed the Consortium Agreement of 1954, granting U.S., British, and French oil companies 40 percent ownership of the nationalized oil industry for twenty-five years.
However, this capitulation, among other factors, sparked the Iranian Revolution in 1978. The “shah,” or “king,” and the Iranian monarchy were subsequently dismantled, and an Islamic republic was installed in their place.
Regardless of the origin or style of their governance, both Mohammad Mosaddegh and Shah Mohammad Reza Pahlavi faced periods of significant unpopularity among segments of the Iranian population. Mosaddegh was deeply unpopular for his nationalization of the oil industry, while the shah relied on U.S. support to maintain power. Perceived communist political ties and an authoritarian rule only magnified this unpopularity and contributed to his official overthrow in 1979.
Following the 1979 Iranian Revolution, tensions between the two nations rose. The U.S. was dubbed the “Great Satan,” portrayed as being caught in the imperial game between Great Britain and Russia in the early 20th century.
As the Cold War continued to escalate, the United States’ involvement with Iran expanded as it tried to maintain control of the region.
Iranian Oil Wealth
Iran sits along the Strait of Hormuz, a narrow waterway between the Persian Gulf and the Gulf of Oman, controlling 20 percent of the world’s oil transit. In fact, according to the U.S. Energy Information Administration, oil flow averaged 21 million barrels per day, an amount representing 21 percent of global petroleum liquids consumption in 2023, making it a critical artery for global crude oil transport. With such a strategic location, any military confrontation in this region threatens to disrupt one of the most critical chokepoints in the global energy supply.
Recognizing this tactical advantage, Iran has repeatedly threatened to block the Strait in response to sanctions or military pressure. Even the possibility of such disruption typically causes oil prices to spike, as traders anticipate shortages.
Notwithstanding these threats, energy markets are already notoriously sensitive to geopolitical tension, especially in the Middle East. As oil prices are determined by pricing and access in global markets, any instability in any oil-producing region can drive up prices internationally. This year, in the days following reports of Israeli airstrikes inside Iran, Brent crude, the international benchmark for oil, jumped to 74.23 dollars a barrel, an increase of 7.02 percent. While that price later stabilized, the jump rippled through global markets.
For American consumers, any tension in the Middle East can translate to higher gas prices and rising transportation costs. Higher gas prices even inflate food prices, as companies pass along the cost of more expensive fuel. Airlines, freight companies, and agricultural sectors are particularly vulnerable to oil market fluctuations.
Potential for Economic War Shock Today
On June 18, Federal Reserve Chair Jerome Powell told reporters, “When there’s turmoil in the Middle East, [there] may [be] a spike in energy prices, but it tends to come down.” Even so, the Fed is watching closely. Any sustained rise in oil prices could complicate its current monetary policy. With inflation showing signs of cooling and rate cuts on the table later this year, a sudden energy price surge could stall or even reverse progress, straining consumers already managing high living costs.
With unclear political messaging and broken foreign cooperation, energy prices may shake up both domestic and international economies.