The Worst-Case Economic Outcome of Trump’s Iran War
Oil shocks don’t only raise prices. They also destroy growth and jobs.
THE IRAN WAR HAS BROUGHT the dreaded r-word—recession—back into play amid a deeply fractured global energy market. To be clear, a massive downturn is not inevitable, nor can we even say it’s more likely than not. Recent surveys of economic forecasters place recession odds over the next year at about a third.
But those surveys were at least partly fielded before recent escalations in the war. And historically, oil shocks have preceded recessions in the United States (and elsewhere). So it’s worth walking through why this war and its resulting supply-chain disruptions have significantly raised the odds of recession—and what that outcome would actually look like. Buckle up. . .
The war isn’t just raising prices—it’s also slowing growth
Even before the war, the U.S. economy was showing serious signs of fragility.
Inflation has been above the Federal Reserve’s target of 2 percent for five years now, and Donald Trump’s trade wars have contributed to rapid price growth. For example, wholesale prices rose sharply in February (i.e., before the war began). Meanwhile, job growth has also sputtered; Fed Chair Jerome Powell said in a press conference Wednesday that if you adjust for what Fed staff thinks may be “overstatement” owing to methodological challenges, there has been effectively “zero net job creation in the private sector” over the past six months. And uncertainty (related to trade wars, regulatory changes, various rule-of-law-type risks) has also been a drag on economic growth.
That was the grim baseline prior to the war. Now layer on to those conditions a global oil shock.
Oil prices have been extremely volatile since the war started. Brent crude briefly surged above $119 per barrel on Thursday morning, then fell back and settled around $108. Fuels made from crude have become painfully expensive, with diesel prices nationwide now above $5 per gallon, and gasoline prices inching toward $4 per gallon. In much of the western United States, they’re already well above that milestone.
Jet fuel prices have likewise nearly doubled in the past month, leading to higher airline fares and canceled flights.
And needless to say, this is not only a U.S. story. Petroleum product prices have shot up even higher in Europe and Asia, leading to fuel hoarding and social unrest. The same holds true for liquefied natural gas prices, although the United States is relatively insulated from that hike because we produce so much LNG ourselves.
Obviously, high fuel prices are frustrating for consumers, who see billboard advertisements on their drive to work every day reminding them how expensive gas keeps getting. But fuel prices don’t just feed into inflation; they also have enormous consequences for global economic growth.