How a War in Iran Raises Your Rent: A General Equilibrium Perspective on Oil Shocks

 

Source: Federal Reserve History (image credit: Getty Images)

 

In 1979, as inflation surged into double digits, President Jimmy Carter told Americans the problem was not just economic, but also cultural. “Too many of us now tend to worship self-indulgence and consumption.” As fuel shortages worsened and prices climbed after an oil shock triggered by the Iranian Revolution, the message was simple: consume less and perhaps reflect a little. The electorate responded even more simply: vote him out.

 

Decades later, as oil prices spike again amid geopolitical conflict, the question remains: how can a disruption in one market ripple through the entire economy, and why does it feel like everything suddenly becomes more expensive?

 

 

General Equilibrium

To understand why, it helps to start with supply and demand. Most people are familiar with the basic logic. When something becomes scarce, its price rises; when it becomes more abundant, its price falls. In microeconomic terms, this reflects shifts in supply and demand. When oil becomes scarce, the supply curve shifts leftward, increasing equilibrium prices.

In isolation, this seems straightforward, where each market adjusts on its own. Introductory economics often presents markets in this way: as separate, self-contained systems where prices respond only to changes within that market.

But real economies do not operate like this. Markets are deeply interconnected. The price of one good can affect the cost of producing another, the demand for related products, and the behaviour of consumers and firms elsewhere. A change in one part of the economy rarely stays contained; it spreads.

A partial equilibrium approach would consider only the oil market in isolation, focusing on how prices adjust within that single market. However, this would underestimate the true impact. Economists describe this broader interaction as General Equilibrium: a framework in which multiple markets are considered simultaneously, and where changes in one market can ripple through many others. Instead of analysing markets in isolation, general equilibrium focuses on how they move together.

 

A Market That Touches Everything

Oil is a clear example of this interconnectedness. It is deeply embedded across the economy, linking activities that might otherwise appear unrelated. The scale alone is striking: the world consumes around 100 million barrels of oil per day! (International Energy Agency, 2024).

 

A large share of this demand is tied to movement. Around half of global oil use is linked to transport, meaning the movement of goods, from raw materials shops, which depends heavily on oil (Ritchie and Roser, 2023).

 

But oil’s role extends far beyond transport. It is also directly used in production, particularly in the manufacture of plastics, chemicals, and fertilisers, which shape the cost of everything from packaging to the chicken nuggets you buy at Sainsbury’s (International Energy Agency, 2024). This is what gives oil its economic significance: its effects are rarely confined to where they begin.

Source: Visual Capitalist (2020)

The Ripple Effects

As a president, when faced with a grave economic shock, you can choose to convey a few outlooks. Trump, in the initial stages of the Iran War, decided to brush off the situation, saying, “We don’t use the Strait of Hormuz… we don’t need it.” The Strait of Hormuz is a narrow but critical shipping route through which roughly a fifth of global oil supply passes, meaning any disruption can have significant worldwide consequences (IEA, 2025). This approach has worked out for him so far, contrasting with Jimmy Carter’s response during the 1970s energy crisis, where he called for national “soul-searching” and urged Americans to confront overconsumption and adjust their lifestyles, and yet people often prefer to act as if nothing will go wrong (Rivers, Kelly and Kenin, 2025).

Nevertheless, the Strait of Hormuz matters enormously for the whole world. According to EIA, around 20% of global oil supply is transported through the Strait (U.S. Energy Information Administration, 2024). Disruptions due to the war sent prices soaring. Following the outbreak of the conflict, Brent crude moved from around $75 per barrel to peaks above $115 (The Guardian, 2026). This increase shows up quickly in fuel prices, as changes in one market spill over into others. Petrol prices rose by around 6.5% in March, and diesel by more than 12% (Bloomberg, 2026).

This increase feeds directly into firms’ cost structures, making it more expensive to move goods and operate production processes. As firms aim to maximise profits, higher input costs reduce profit margins, leading them to raise prices or cut output, thereby transmitting the shock across markets. In microeconomic terms, this corresponds to a leftward shift in the supply curve across affected industries. The new equilibrium is characterised by high prices and lower quantities, illustrating how a shock in one market propagates across others.

The effect becomes more visible further along the chain. Fertiliser prices have also risen sharply, with urea – the most widely used fertiliser – up by around 40% since the start of the war (AHDB, 2026). Spillover effects don't stop here. For agriculture, this raises the cost of producing food, which then feeds into the prices consumers face in shops. The Food and Drink Federation (FDF) has warned that UK food inflation could reach as high as 9% by the end of 2026 as a result of the conflict. While these pressures reflect multiple factors, the supply shock to the oil market remains a central driver.

As these price increases reach households, they begin to affect consumption decisions. Higher fuel and food prices reduce real purchasing power, forcing people to cut back or shift spending toward cheaper alternatives. This, in turn, affects demand conditions across sectors, feeding back into prices and production decisions, setting off further rounds of adjustment with decreasing impact. As so many products rely on oil and energy, price increases appear simultaneously in different parts of the economy, creating a sense that everything has become more expensive.

 

However, oil isn't the only reason prices go up. Governments can step in with things like subsidies or price controls to soften the impact, and other factors, like supply chain problems or shifts in consumer demand, also matter. So while general equilibrium helps us understand how everything is connected, in reality, price changes usually come from a mix of different forces.

Reference List

 

AHDB (2026) GB fertiliser prices. Available at: https://ahdb.org.uk/GB-fertiliser-prices (Accessed: 23 April 2026).

Bloomberg (2026) UK petrol prices surge to highest in 18 months amid Iran war. Available at: https://www.bloomberg.com/news/articles/2026-03-17/uk-petrol-prices-surge-to-highest-in-1-1-2-years-amid-iran-war (Accessed: 20 April 2026).

Food and Drink Federation (2026) Food inflation outlook and industry update. Available at: https://www.fdf.org.uk/ (Accessed: 20 April 2026).

International Energy Agency (2024) Oil Market Report. Available at: https://www.iea.org/reports/oil-market-report (Accessed: 20 April 2026).

Ritchie, H. and Roser, M. (2023) Transport. Our World in Data. Available at: https://ourworldindata.org/transport (Accessed: 20 April 2026).

Rivers, M., Kelly, M.L. and Kenin, J. (2025). What we learn about Jimmy Carter from the president’s ‘Crisis of Confidence’ speech. [online] KBBI AM 890. Available at: https://www.kbbi.org/2025-01-02/what-we-learn-about-jimmy-carter-from-the-presidents-crisis-of-confidence-speech

Strait (2025). Strait of Hormuz – Oil security and emergency response - IEA. [online] IEA. Available at: https://www.iea.org/about/oil-security-and-emergency-response/strait-of-hormuz

The Guardian (2026) Oil prices rise amid Iran war disruptions. Available at: https://www.theguardian.com/business/2026/apr/12/collapse-us-iran-talks-energy-shock-oil-prices (Accessed: 22 April 2026).

U.S. Energy Information Administration (2024) World oil transit chokepoints. Available at: https://www.eia.gov/international/analysis/special-topics/World_Oil_Transit_Chokepoints (Accessed: 20 April 2026).