Dallas Fed Economics: What the Closure of the Strait of Hormuz Means for the Global Economy

Institution: Federal Reserve Bank of Dallas

Date: March 20, 2026

URL: https://www.dallasfed.org/research/economics/2026/0320

File: dallas-fed-hormuz-closure.md

Summary

This Dallas Fed analysis quantifies the economic impact of a full closure of the Strait of Hormuz using a formal model of geopolitically driven oil supply disruptions. It estimates that removing ~20% of global oil supplies for one quarter would raise WTI oil prices to $98/barrel and reduce global real GDP growth by 2.9 percentage points annualized in Q2 2026. The analysis provides scenario-dependent projections for one-, two-, and three-quarter closures, and examines缓解 mechanisms including Saudi Arabia's East-West pipeline and the UAE bypass pipeline.

Key Findings

1. **Magnitude comparison to prior shocks:** The current Hormuz closure removes close to **20% of global oil supplies** — 3–5× larger than the 1973 Yom Kippur War (~6%), 1979 Iranian Revolution (~4%), 1980 Iran-Iraq War (~4%), and 1990 Gulf War (~6%) disruptions. This makes it historically unprecedented. (Dallas Fed, March 2026)

1. **One-quarter closure scenario:** WTI peaks at **$98/barrel in Q2 2026**; global real GDP falls **2.9 percentage points annualized** in Q2. Recovery to pre-closure GDP levels is incomplete: 0.2% below pre-closure level by end-2026, 0.1% below by end-2027. (Dallas Fed, March 2026)

1. **Two-quarter closure scenario:** WTI rises further to **$115/barrel in Q3 2026** before falling to $76 in Q4. Global real GDP impact remains negative through Q4 2026; full-year 2026 Q4/Q4 GDP reduction of **0.3 percentage points**. (Dallas Fed, March 2026)

1. **Three-quarter closure scenario:** WTI reaches as high as **$132/barrel by year-end 2026**; full-year 2026 Q4/Q4 GDP reduction of **1.3 percentage points**. Growth remains negative through end-2026. (Dallas Fed, March 2026)

1. **Gulf share of global oil exports:** ~20% of global oil supplies are produced in the Persian Gulf; approximately **80% of Gulf oil is shipped to Asia**. The remainder goes to Europe and other regions. (Dallas Fed, March 2026)

1. **Saudi East-West Pipeline (Petroline) alternative capacity:** Capacity of approximately **5 million b/d**, but Yanbu port can practically load only ~2.5 million bpd. This could redirect about one-fifth of the global supply shortfall from Hormuz. However, Yanbu and Red Sea routing are within range of Iranian and Houthi missiles. (Dallas Fed, March 2026)

1. **UAE Habshan-Fujairah pipeline:** Already under Iranian attack, making existing flows difficult to maintain, never mind increase. (Dallas Fed, March 2026)

1. **Alternative paths:** China negotiating direct deals with Iran for tanker passage (similar to India's recent deal); or oil traffic resuming in a hostile environment similar to the 1980s Tanker War, where on average one tanker was struck every day at peak. (Dallas Fed, March 2026)

1. **Reducing shortfall from 20% to 10%** would lessen quarterly GDP impact from -2.9 to **-1.6 percentage points** at annualized rates. (Dallas Fed, March 2026)

1. **U.S. GDP impact:** The U.S. economy, now roughly petroleum trade-balanced due to the shale boom, is expected to experience effects similar in magnitude to the global effects. (Dallas Fed, March 2026)

1. **Conflict context:** Military conflict between Iran and the U.S./Israel began **February 28, 2026**. Attacks targeted oil infrastructure in Saudi Arabia, Kuwait, and UAE. The closure was initially driven by insurance contract adjustments for oil tankers, then by attacks causing shipwrecks. (Dallas Fed, March 2026)

Entities Mentioned

• **Organizations:** Federal Reserve Bank of Dallas, U.S. military, Israeli military, Saudi Aramco
• **Places/Countries:** Iran, United States, Israel, Saudi Arabia, Kuwait, UAE, Qatar, Bahrain, Iraq, China, India, Yemen (Houthis), Oman
• **Ports/Facilities:** Strait of Hormuz, Bab el-Mandeb, Red Sea, Suez Canal, Yanbu port (Saudi Arabia), Fujairah port (UAE), Habshan-Fujairah pipeline, East-West Pipeline (Petroline)
• **People:** Lutz Kilian, Michael Plante, Alexander W. Richter (authors)
• **Numbers:** 20% (Gulf share of global oil), 80% (Gulf oil shipped to Asia), $98/b (WTI one-quarter closure peak), $115/b (WTI two-quarter peak), $132/b (WTI three-quarter peak), 2.9 pp (Q2 GDP impact one-quarter), 0.2% (permanent GDP loss one-quarter closure), 0.3 pp (Q4/Q4 GDP loss two-quarter), 1.3 pp (Q4/Q4 GDP loss three-quarter), 5 mbd (East-West pipeline capacity), 2.5 mbd (Yanbu practical capacity), ~1 tanker/day struck at peak of Tanker War (1980s)

Relevance to Q1/Q2/Q3

• **Q1 (Hormuz closure extent):** High relevance — documents the ~20% supply removal, compares to all prior geopolitical oil shocks, describes the closure dynamics (insurance, attacks, shipwrecks), and assesses alternative routing capacity
• **Q2 (Price impact):** High relevance — provides formal model-based price forecasts for one-, two-, and three-quarter closure scenarios ($98, $115, $132 WTI peaks); documents GDP impact quantification
• **Q3 (Europe gas/security):** Low direct relevance — analysis is primarily oil-focused; Europe is a minor Gulf oil customer (~20% of remaining); gas/fertilizer disruptions noted as outside the model scope

Quotes

"A complete cessation of oil exports from the Gulf region amounts to removing close to 20 percent of global oil supplies from the market, about 80 percent of which is shipped to Asia." — Dallas Fed, March 2026

"What makes the closure of the Strait of Hormuz different from these earlier oil supply shortfalls is first and foremost its magnitude. For example, in 1973 and 1990 only a little more than 6 percent of global oil supplies was removed from the market and in 1979 and 1980 only about 4 percent. Today, we are concerned with a shortfall close to 20 percent, making this geopolitical event three to five times larger." — Dallas Fed, March 2026

"While it may take some time to fully restore the flow of oil through the Strait of Hormuz, a key insight from our model is that merely reducing the shortfall of oil could substantially damp the impact on the global economy." — Dallas Fed, March 2026

Related Articles

• [[Q1-SUPPLY-DESTRUCTION]]
• [[Q2-PRICE-IMPACT]]
• [[Q3-EUROPE-IMPACT]]
• [[EIA-STEO-April-2026]]
• [[Congressional-Research-Service-Iran-Hormuz]]
• [[WTO-Hormuz-Trade-Tracker]]
• [[UNCTAD-Rapid-Assessment-2]]