If you are closely observing the unfolding turmoil in the Middle East and thinking, “This doesn’t affect me,” it may be because you reside on the West Coast or in a prominent Northeastern metropolitan area.
According to an analysis conducted by Oxford Economics, the specific geographical location of an individual significantly influences the financial repercussions of the war in Iran.
The economic fallout initiated by U.S. and Israeli strikes against Iran has led to rising oil prices and fluctuations in equity markets. Oil prices, in particular, warrant attention as consumers increasingly experience the burden at the gas station amidst existing susceptibility to additional affordability pressures.
The spike in oil prices can be attributed to the strategic importance of the Strait of Hormuz, where Iran has exerted control. This critical shipping lane, which sees the passage of approximately 20 million barrels of oil daily, accounts for nearly 20% of global oil supply. With Iran asserting its dominance over the strait and deploying mines, many ship captains are reluctant to navigate these waters, effectively restricting global supply and causing prices to surge.
Moreover, the economic disruption from the strait’s condition extends beyond oil. Fertilizers, derived from gas production, are also affected, resulting in escalating agricultural costs. Producers face a limited capacity to absorb these rising costs before passing them on to consumers, who will ultimately bear the financial burden due to heightened prices. Furthermore, the surge in gas costs impacts businesses, ballooning transportation expenses for farm machinery, commercial shipping, trucking, and delivery services.
According to Barbara Denham from Oxford Economics, the conflict in Iran, combined with the resultant increase in oil prices, has a “disproportionate” effect on low-income households, who allocate a larger share of their budgets toward fuel, food, and utilities—items whose costs have risen due to the ongoing war.
Denham highlighted that “metropolitan areas where households devote a significant proportion of their income to these necessities are primarily located in the South, particularly in West Virginia, as well as scattered throughout the Midwest.” Many of these regions are relatively small in size.
Cities such as Jackson, Hattiesburg, and Gulfport in Mississippi, St. Joseph in Missouri, and Des Moines are among the hardest hit, as residents in these areas dedicate an average of 16% of their total budget to groceries, fuel, and utilities. It is no surprise that these locations also exhibit a high prevalence of low-income households earning less than $35,000, often found in smaller, more isolated communities.
The overall impact on household finances due to rising oil prices will depend heavily on the duration of the ongoing conflict, its eventual resolution, and the rate at which trade routes can be reopened. Recent insights from Wolfe Research's chief economist, Stephanie Roth, indicated that “food at home” inflation could increase by approximately two percentage points, contributing an additional 0.15 percentage points to the overall inflation rate.
A recent update from the Institute of Grocery Distribution in the UK suggested that food inflation could climb from the current rate of 3.6% to over 8% by June.
In contrast, residents in West Coast and Northeastern metropolitan areas allocate a smaller portion of their total budget towards groceries, utilities, and fuel. Households in Seattle, Ithaca (NY), Lakeland (FL), Vineland (NJ), and Phoenix typically spend 11% or less of their total budget on these essential costs.
Denham noted, “While we anticipate that rising energy prices will significantly affect headline inflation more than growth—at least in the short term—the psychological toll of both the war and soaring gas prices is already reflected in consumer sentiment surveys.” The forecast still anticipates a 1.9% increase in consumer spending this year; however, the GDP growth forecast has been revised from 2.8% to 2.4% due to the pressures of escalating oil prices and their associated uncertainties on consumer expenditure.
Although rising oil prices may not be welcome news for the general consumer, they do offer a silver lining for the oil drilling and gas extraction sectors. The U.S. became a net exporter of petroleum for the first time since at least the 1940s in 2020, as reported by the U.S. Energy Information Administration.
This situation means that specific regions—and certain states—will likely experience an uptick in growth as a result of the new dynamics of supply and demand. Notably, over half of the GDP generated from drilling is sourced from non-metropolitan counties: the Permian Basin in West Texas, which includes parts of New Mexico, is responsible for 35% of the overall mining and drilling GDP and 12% of related employment.
Denham elaborated, “While we predict a modest increase in mining GDP in these counties, the implications for job growth will be more subdued, as firms can increase production in the short term.”
Regions engaged in the refining process are also expected to benefit, as noted by Denham: “The refined oil sector will experience a short-term boost in GDP from the surge in oil prices. Unlike drilling, refining activities are concentrated partly in Texas (Houston, Beaumont, Corpus Christi, and Dallas) but are also significantly present in cities like Los Angeles, Chicago, New Orleans, Minneapolis, San Francisco, and Bellingham (WA). Indeed, the top ten metropolitan areas account for 50% of refining GDP and account for a third of jobs in this sector.”
Share this story