Nobel Prize-winning economist Paul Krugman says a basic economic concept shows that the true cost of President Donald Trump’s war with Iran extends well beyond the headline price of crude oil, with hidden inflationary pressure that could contribute to an “economic catastrophe.”

Writing Friday in a Substack post, Krugman argued that the economic damage from the ongoing war depends on more than the market price of a barrel of oil.

“Yesterday,” Krugman wrote, “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.”

Krugman said the economic effects during the first phase of the war were comparatively limited because the world was able to offset some oil needs by drawing down inventories, rerouting oil through the Red Sea and taking other measures. But he warned that “the second Hormuz closure could be worse, for several reasons.” The Strait of Hormuz, located between Iran and Oman, is one of the world’s most critical oil transit chokepoints, handling roughly a fifth of global petroleum consumption on a typical day.

“Iran’s Houthi allies are now attacking shipping in the Red Sea, threatening that safety valve,” he wrote. “Also, inventories are now much lower than they were when the conflict began, and can’t serve as a cushion going forward.”

Krugman said the key point in the current situation is that oil is “more expensive than it looks.” Crude oil itself is not consumed directly, he noted, and must first be refined into usable fuels, mainly gasoline and diesel.

“Nobody burns crude oil,” Krugman wrote. “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.” Ukraine’s drone strikes on Russian oil refineries over the past year have repeatedly knocked significant processing capacity offline, compounding a tightening global refining picture.

According to Krugman, the shortage of refining capacity has helped restrain crude prices because buyers have less incentive to purchase crude they cannot process. But that same bottleneck means the prices paid by end users for petroleum products are far higher than the crude price alone would suggest.

“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,” he wrote.

From the perspective of consumers and businesses that buy refined fuels, Krugman said, that increase functions as though crude oil had risen by an additional $40 per barrel.

“In effect, the world is coping with the equivalent of $140 oil even though the headline price is ‘only’ around $100,” he wrote.

Krugman said that does not necessarily guarantee “economic catastrophe,” but he argued that the risk remains significant. He said the recent decline in inflation now appears likely to have been temporary.

“Last month’s easing in the inflation rate now looks temporary,” Krugman wrote. “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.”

Krugman also pointed to reporting from The Wall Street Journal that Trump is in “revenge mode,” while the U.S. military is increasing its presence in the Middle East.

“Things could be worse,” Krugman concluded, “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.”