One economic concept reveals the true cost of Trump’s war: Nobel economist

U.S. President Donald Trump arrives at Paris Orly airport, following the G7 Summit, in Orly, France, June 17, 2026. REUTERSEvelyn Hockstein

One basic economic concept makes it clear that the true cost of President Donald Trump’s war with Iran extends far beyond the price of oil, and that the hidden inflation could result in “economic catastrophe.” This is according to Nobel Prize-winning economist Paul Krugman, who on Friday explained why the economic damage of the ongoing war hinges on more than the price of oil barrels.

“Yesterday,” writes Krugman, “Trump declared that the Iran war is going ‘better than anybody expected could be done.’ He’s delusional, of course. And his delusions are the reason the price of oil is back at around $100 a barrel, and — as I’ll explain shortly — the effective price is much higher than that.”

Krugam asserts that while the economic impacts of the first phase of the war were relatively slight, eased by the world offsetting its oil needs by drawing down inventories, rerouting oil through the Red Sea, and other measures, “the second Hormuz closure could be worse, for several reasons. Iran’s Houthi allies are now attacking shipping in the Red Sea, threatening that safety valve. Also, inventories are now much lower than they were when the conflict began, and can’t serve as a cushion going forward.”

“Perhaps the most important thing to realize about the current situation, however, is that oil is more expensive than it looks.” As Krugam explains, “Nobody burns crude oil. Oil must be refined into usable fuels, mainly gasoline and diesel. And there’s a global shortage of refining capacity. This partly reflects the war in Iran, but it also reflects Ukraine’s stunningly effective campaign against Vladimir Putin’s energy infrastructure.”

While the refining capacity shortage has helped keep crude prices down — “why buy crude when you can’t refine it?” — Krugman asserts that “it means that prices of petroleum products to end users are much higher than one would have expected given the price of crude. The overall ‘crack spread’ — the difference in price between a barrel of crude oil and the price of the products into which that barrel is refined — has exploded, from around $25 a barrel before the war to more than $65 now.”

In this context, “from the point of view of end users, this is the same as if crude prices had risen an extra $40 per barrel. In effect, the world is coping with the equivalent of $140 oil even though the headline price is ‘only’ around $100.” Krugman says that while it doesn’t necessarily guarantee “economic catastrophe,” it still could be on the way.

“Last month’s easing in the inflation rate now looks temporary,” writes Krugman. “With energy prices surging again — not to mention the inflationary impact of Trump’s new round of tariffs, imposed using the ludicrous excuse that nations aren’t doing enough to stop forced labor — interest rates will almost surely rise, intensifying the squeeze on families and businesses. Long-term rates, reflecting expected future Fed hikes, are already way up.”

“Things could be worse,” Krugman concludes, “and they may be about to get worse. The Wall Street Journal reports that Trump is in ‘revenge mode,’ and the U.S. military is surging forces into the Middle East. And if Trump doubles down on failure, drastically escalating his disastrous war, the economic, not to mention human, impacts will get much uglier.”

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