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Initial hopes that the US-Iran war would be resolved swiftly have failed to materialize, and even an immediate resolution or cease-fire would leave behind damaged infrastructure and several weeks of massively disrupted energy production and shipping. Although hopes of a cease-fire have allowed prices for West Texas Intermediate (WTI) to fall below $90 per barrel after climbing above $95 per barrel in recent weeks, many forecasts have shifted to oil prices of $80-90 per barrel in 2026, a level that will exacerbate the US economy’s persistent inflation issues. High oil prices will cramp consumer budgets and thus demand for paper and board, especially as producers seek to pass on increases in production and transportation costs. Few, if any, global markets will escape the effect of the war, creating complex effects for trade.
The most direct effect of the war on the US economy is already under way as nearly the $100-per-barrel oil of mid-March works its way into fuel prices and transportation costs that underlie so much of the US goods economy. While it will take a few months for government inflation statistics to catch up, the March surge will result in year-on-year oil increases that rival both the pre-2009 and post-2020 periods.
Prior to the elevated broad inflation that has been in place since 2021, the relationship between oil prices and headline consumer price index (CPI) inflation was quite consistent, with a correlation of more than 80% between the year-over-year change in oil prices and year-over-year inflation. Part of this relationship is probably driven by the fact that oil price movements usually include a demand component; normally, oil prices tend to climb when a healthy economy is also driving broad inflation and dip when the overall economy is weak. Nonetheless, many estimates suggest that $100-per-barrel oil could singlehandedly push headline inflation up by close to an entire percentage point, a major obstacle for consumers and paper and board demand.
Thankfully, the relationship between oil prices and inflation outside energy is not nearly as strong. Figure 1 also includes the year-over-year change in the Personal Consumer Expenditures (PCE) index excluding energy, which has been much more stable even when oil prices have risen steeply. Oil prices do not appear to filter through to consumer prices excluding energy nearly as quickly or as severely as might be expected, a rare but welcome encouraging conclusion from Figure 1. Unfortunately, consumers cannot simply exclude volatile energy prices; they must absorb them, which will reduce spending in other areas and weaken any manufacturing momentum that may have been reflected by the positive survey readings readings of January and February.
One of the most discouraging aspects of Figure 1 is that both measures of broad inflation came into the war well above target. We have yet to see any real progress in addressing the US economy’s post-pandemic inflation issues, even with oil prices declining throughout 2025. The economy may not yet have fully absorbed the effect of the 2025 tariffs and is now facing a historically large oil price shock.
Figure 2 presents various scenarios that apply rule-of-thumb consequences for oil price increases to gasoline prices and the US economy. For $100-per-barrel oil, Figure 3 suggests that gasoline prices should rise about $1.00. Indeed, US average unleaded prices rose from about $2.90 per gallon in February to about $3.85 in mid-March, illustrating both the accuracy of the estimate and the speed at which gasoline prices incorporate upward shocks.
For gross domestic product (GDP), Figure 2 suggests that a sustained rise to $100-per-barrel oil would result in a half-percentage-point hit to growth. This is smaller than the projected full point increase in inflation because high oil prices benefit the large US energy industry. While our analysis of US GDP usually focuses on the extent to which healthcare spending and artificial intelligence investments have caused packaging demand to de-couple from healthy headline figures, this unfortunately does not apply to the oil price shock. The goods economy will be fully exposed — and perhaps even bear more than its fair share — of any handicap to US GDP growth through the effect of gas prices on already cramped consumer budgets and the simple fact that transporting physical goods and inputs will become more expensive.
Consequently, it is very difficult to avoid a shift to weaker demand outlooks unless the war is rapidly resolved or de-escalated. For graphic paper, negative demand performances are already customary and will move down further.
Since 2023, paper packaging demand has been continually cramped by consumers’ struggles with persistent inflation and policy volatility. These issues are currently on track to worsen rather than ease in 2026, yet again delaying the long-awaited recovery. This is especially the case given that persistent inflation and weak job creation caused real discretionary income to decline in the second half of 2025, with the effect of higher gas prices potentially pushing income growth even farther below the approximately 2.5% threshold needed to drive a robust corrugated demand recovery.
As if the weaker demand outlook were not enough, producers must also contend with increased cost inflation caused by the oil price shock. The most obvious and direct area of impact is transportation, with the rise in diesel from a pre-war level of about $3.80 per gallon to $5.00 per gallon increasing fuel costs for trucking. At current trucking rates and using a typical surcharge framework, this works out to about a 10% increase in trucking costs from fuel alone. While spot rates for trucking have not yet moved this much, the resulting margin compression raises the risk of further trucking capacity reductions that could eventually create upward pressure on rates beyond the fuel inflation.
For outbound shipments from mills and packaging plants, we estimate that the increase in diesel and trucking from $100-per-barrel oil would represent a cost increase of about $8 per ton of containerboard produced, a seemingly modest figure but one that excludes the impact of increased diesel costs for harvesting and transporting timber and collecting and shipping recycled fiber, not to mention the cost of shipping converted products such as corrugated boxes. System-wide fiber transportation costs might rise by about $13-22 per ton if oil remains near $100 per barrel. If tensions cool enough for oil prices to ease to about $80 per barrel, the upward pressure on costs and the negative effect on the economy would fall to about 40% of a $100-per-barrel scenario or about 70% in a $90-per-barrel scenario.
The good news for the US is that its energy independence should keep it fairly insulated from the war’s effect on natural gas prices compared with European manufacturers that will be highly exposed to disruptions in the Middle East’s broader fossil fuel and petrochemicals production. US natural gas prices have remained tame since the extreme seasonal spike of December and January. Besides its key role in energy, natural gas feedstock accounts for about 70% of US production costs for caustic soda and chlorine. Nonetheless, many other key industrial and papermaking chemicals are closely linked to fossil fuel processing, and it is somewhat difficult to see the spike in oil prices not driving overall chemical costs upward by more than headline inflation. One silver lining for the paper packaging industry is that costs for producing plastic are probably even more exposed to the oil shock.
Any acute inflation caused by the war will be amplified by the departure of beneficial cost trends from 2025. Inflation for wholesale prices and input prices for Stage 4 goods producers (the supply chain step before wholesale) has been accelerating upward over the past several months, and electricity remains a major issue for both consumers and manufacturers. In 2025 and early 2026, these pressures were offset by decreasing costs for recycled fiber and oil, keeping production costs stable. US recycled fiber prices are already quite cheap; there is limited opportunity for further relief, and average US OCC prices moved up in February and March. The lack of cost relief in 2026 from oil should go without saying.
Coming into the war, very few North American paper and board markets featured supply and demand balances that would clearly support price increases. Nonetheless, producers now face a more inflationary outlook and must choose between margin compression, exacerbated by lower volumes, or attempting to pass on oil-driven cost inflation through price increases or surcharges. The latter may prove easier for buyers to accept given that surcharges can be rolled back when oil descends while simultaneously offering producers greater flexibility for shipping distances or if disruptions and oil price inflation worsen.
As discussed by Alejandro Mata, the war’s effect on energy prices in Europe, including natural gas, is far more severe, creating a crisis similar in severity to the initial outbreak of the Russia-Ukraine war. This will greatly raise costs for European mills exposed to natural gas, potentially enhancing the competitiveness of US exports to Europe and reducing European mills’ ability to profitably ship to the US, especially given continuing US tariffs. One of the most exposed grades of European paper and board is testliner. If European natural gas prices rise by €30 per megawatt-hour, average costs for testliner could climb by €40 per tonne from energy alone. US containerboard and newsprint producers have recently shifted away from lower-margin export markets, but the pressure on energy-exposed mills may drive European prices high enough to renew the appeal of exports, at least as long as there is demand for shipments from the US.
The US imports significant volumes of printing & writing paper and folding boxboard (FBB) from Europe. Exposure to natural gas is relatively low for FBB and mechanical grades. The latter is somewhat surprising given the lack of chemical pulp integration for these grades, with the explanation being the European industry’s reliance on generating energy from biomass, a rare forest product which may see demand tailwinds from the war. Although average exposure to natural gas is relatively high for European freesheet papers, most mills exporting to the US are integrated to kraft pulp and therefore have much lower exposure to purchased energy, so the exposure of European exporters to the US to the explosive rise in natural gas prices is much more limited. Nonetheless, exporters will still face increased chemical costs, probably worse than in the US, and the impact of increased fuel costs on ocean freight. Even in early March, ocean freight rates from Europe to the US Atlantic Coast had already increased by $10 per ton.
The extent to which increased production and shipping costs will discourage exports to the US remains to be seen. Europe exports a substantial amount of its production to the Middle East, where economies and shipping may be maximally disrupted, and to Asia, for which shipments through the Suez Canal have also faced disruption. Consequently, European producers may end up with a greater need to export to the Americas, for which shipping is merely more expensive.
Much remains uncertain, especially regarding the war’s effect on trade flows, the extent to which producers will be able to pass on cost inflation, not to mention whether the conflict will heighten or be resolved. If oil remains expensive, however, it will certainly result in a diminished economic outlook and an increased outlook for cost inflation.
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