Over the many periods of conflict in the Middle East over the past few decades, a series of heuristics around the impact of a sharp increase in the price of oil and gasoline on the American economy have been developed.
These episodes have spurred a move to both diversify away from a dependence on imported oil and enhance domestic production.
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The result is that in today’s American economy, spikes in oil prices do not present the same significant downside risk to top-line economic growth or inflation as they did a half century ago.
I can remember as an adolescent in the 1970s sitting in the back of the family car, waiting in long lines for gasoline, and can attest that we are just not as vulnerable to sharp increases in the price of oil and gasoline as we were then.
Back then, the U.S. produced 15.6% of the global oil supply. Today, the U.S. produces 18.9% while oil’s importance to the economy has declined from 1.5% of gross domestic product in 1979 to 0.4% now.
The American economy is far less exposed to economic and inflation disruptions while its overall size as tripled.
On Monday, West Texas Intermediate and Brent crude rose by 7% to 8%, which would translate to a less than 0.1% drag on GDP and a less than a 0.2% increase in inflation should the increase hold.
Put another way, a $10 per barrel increase in the price of oil should translate to a 0.2% increase in inflation and 0.1% drag on growth. Given that the current increase in the cost of oil is below $10, we think the risk to the growth and inflation outlook is modest.
A $10 increase in the cost per barrel of oil translates to an increase of 24 cents per gallon of gasoline, with each barrel containing 42 gallons. With West Texas Intermediate rising by $5 to $6 a gallon, that implies an increase at the pump of 12 and 14 cents per gallon.
While cost-conscious Americans who are dealing with an affordability crisis will not take this increase lightly, such an increase will not materially affect economic growth in the current quarter, which we think will arrive above 3%. Nor will it merit a change in our 2026 forecast of a 2.4% rise in GDP with risk of faster growth.
In fact, given the near 50% jump in the forward contract of liquified natural gas in Europe and the shutdown of the world’s largest LNG facility in Qatar, the United States’ status as a net energy exporter may end up unexpectedly bolstering U.S. GDP.
The disruption of the flow of oil and LNG to U.S. trade partners, if sustained, will slow global growth. But for now, early price action across energy markets simply does not appear to present any material risk to U.S. growth or inflation outlooks.
