Iran War Oil Shock Threatens to Unleash Wave of Global Inflation

President Donald Trump’s war with Iran threatens to deal a severe blow to a global economy still grappling with the impact of his historic tariff hike. For Europe, sustained higher energy prices would take the economy to the brink of recession. For the US, they would place the Federal Reserve in an impossible position — stuck between a war that pushes inflation higher and a president demanding that interest rates come down. For China, the end of discounted Iranian oil imports adds to strain from Trump’s tariffs and a real estate collapse. In the first days of the fighting, the intensity is high and the endgame uncertain. Bloomberg Economics has modeled scenarios for what lies ahead, and what they mean for oil prices, major economies, and the future of Iran. It is, of course, possible that Washington and Tehran find an off-ramp, oil settles back at its pre-escalation average of $65 a barrel, and the global economy dodges a blow. Jennifer Welch, Bloomberg Economics Chief Geoeconomics Analyst, joins Bloomberg Businessweek Daily to discuss. She speaks with Carol Massar and Tim Stenovec. Saudi Arabia has stepped up direct engagement with Iran to try and contain a war in the Middle East that is causing havoc and stressing global markets, according to several European officials.

In recent days, Saudi officials have deployed their diplomatic backchannel to Iran with greater urgency to de-escalate tensions and prevent the conflict from worsening, the officials said, asking not to be named discussing private and sensitive conversations. Several European and Middle Eastern nations are backing these efforts, according to these officials.

The talks have involved both security agencies and diplomats, they added, but it wasn’t clear whether they had involved higher-ranking officials and, so far, Iran has shown little inclination to negotiate with the US or Israel. Officials at the Saudi foreign ministry did not immediately respond to a request for comment. Iran has responded to US-Israel strikes that began on Feb. 28 with missile and drones attacks of its own. Gulf states have urged Iran to avoid retaliating against them and the likes of Saudi Arabia, the United Arab Emirates and Qatar have said the US and Israel cannot use their airspace or territory for any attacks on the Islamic Republic.

So far, the US and Israel, as well as Iran, are saying in public that the war will continue. US President Donald Trump said Friday he will only accept Tehran’s “unconditional surrender.”

Sunni Arab states in the Gulf have long had tense relations with Iran, a Shia-majority country. Still, in recent years, Saudi Arabia and the UAE had sought to improve relations and, before hostilities started, were keen for Iran to agree a diplomatic deal with the US through talks mediated by Oman.

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