The shutdown of the Strait of Hormuz is hurting the economies in Asia that are most dependent on imports of petroleum products.
At the same time, rising oil and gasoline prices are causing a broadening out of demand destruction in the United States as household consumption in the first three months of the year slowed to a 1.6% gain.
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That softening is ahead of what will at best be a flattening out of real wage growth and what may more likely be a decline in inflation-adjusted wages.
The result has been a growing complacency in financial markets that the U.S. will be spared from the war-driven dislocation taking place in Asia.
But a closer look at the data shows that households in the U.S. and Canada, whose economies have become net exporters of oil, have not been spared the rising cost of gasoline and diesel.
In fact, the longer the war endures, the greater the impact will be experienced by the inhabitants of energy-exporting countries.
Disruptions to the global petroleum supply chain and shortages that are likely to follow suggest a greater blow to the North American economies from inflation than is being priced in.
Consider the tight relationship between the consumer price inflation index in the U.S. and Canada, and the price of Brent crude, which is the global benchmark, over the past 10 years.
The recent doubling of Brent crude from $60 per barrel to as high as $125 presents a direct threat to households, which will limit spending to essential items like energy and food at the expense of all others.
There also is a relationship between the price of Brent crude and energy conditions inside the U.S.
U.S. gasoline prices have a 0.93 correlation coefficient with Brent and diesel prices have a 0.90 coefficient.
A simple regression shows that the price of Brent accounts for 86% of the variation in the price of all formulations of gasoline. As the price of Brent crude rises, American consumers will feel it despite the relative energy independence of the economy.
A simple regression shows that gasoline prices account for 64% of inflation, with larger residuals occurring in periods of stress during the post-pandemic inflation shock and the onset of the Ukraine war in 2022.
This spike in oil prices suggests that the energy shock has yet to be fully realized and that inflation will increase.
Can’t the U.S. go it alone?
Aside from localized transportation and refinery charges, oil and petroleum products are bought and sold within a daily global market.
The availability of oil drilled in Texas or Alberta does not imply that Americans or Canadians can be immune from changes in global petroleum prices.
When 10% of the global supply of petroleum is cut off from the rest of the world, as has recently happened, the shortage of supply will push up global prices.
As the global energy crunch intensifies, we are one day closer to the point where domestic producers will want to sell increasing quantities of oil to energy-hungry Asia and Europe.
And that will create incentives inside the U.S. political authority to tempt fate and impose price and export controls.
An export ban, though, will only exacerbate a growing shortage of supply that will push global prices higher. It would be a self-defeating policy for American households and mark a return of 1970’s-style stagflation.
Then there is the temptation to impose price controls. But moving away from price-driven allocation of scarce resources in favor of state-directed distribution will only worsen the energy shock.
