The U.S. has been a net exporter of oil since 2019 and energy independent for the better part of the past 15 years.
Now, with hostilities having broken out in the Middle East, this resilience will help the U.S. economy weather the impact of any increase in global energy prices.
Still, the U.S. is not immune to volatility in global energy markets.
About 20% of oil and natural gas flows through the Strait of Hormuz, and Iran still produces 3% global oil supplies.
Read more of RSM’s insights on the economy and the middle market.
The region remains a vital component of global energy markets, so when this trade is disrupted, American consumers will be affected.
Higher oil prices mean higher prices at the pump, which pushes up inflation and, if sustained, restrains economic growth.
Every $10 increase in the price of a barrel of oil should result in a 0.2 percentage-point increase in inflation and cause a 0.1% drag on overall growth.
Should current conditions hold—an uncertain assumption—the consumer price index would increase to 2.5% at a minimum in June from the current 2.4% and economic growth would be dragged down.
Overall, the impact on the U.S. economy will be muted, but the risks of the conflict expanding remain.
Any increase in oil prices will be quickly passed through to the pump within a matter of days. These higher prices will show up most likely during the week of June 15.
As of Friday morning, the 8% increase in the price of domestically produced oil implies only a modest adjustment in gasoline prices. But given that the conflict might continue, the risk of greater disruption in energy markets is only heightened.
Energy independence
Domestic oil dynamics imply that should oil prices move toward $70 per barrel, production volume will increase.
The price of West Texas Intermediate oil—the domestic benchmark—over the past few months dropped to around $60 to $65, near the average breakeven price for much of U.S. crude oil production.
That breakeven level is a reflection of domestic energy independence as American oil production now stands at 13.4 million barrels per day, 22% higher than five years ago.
This drop in prices stems from an expected global economic slowdown following the shift in U.S. trade policy that would restrain oil demand at the same time that global oil supplies remain strong.
In response to the lower price outlook, oil producers have cut back on their drilling. This is best reflected by the fastest reduction since 2023.
With oil in the $60 to $70 range, producers are simply in “yellow light” territory, taking their foot off the gas pedal.
But should the breakout of hostilities in the Middle East cause oil prices to exceed $70, the higher-price environment would be a green light for producers.
We think that small to midsize producers tend to be more agile than larger ones and will be better positioned to respond to higher prices.
Three scenarios
Because this is a fluid situation, it is necessary to map out the impact on the U.S. economy from a large increase in the price of oil.
The following shows three scenarios in which oil prices increase. In our estimation each scenario, given the risks around rising geopolitical tensions and new tariffs, shows the risk of higher gasoline prices, higher inflation and a greater drag on growth.
- Oil Increases to $80: A $12 increase in the price of domestic oil from the $68.04 close on June 12 should result in a 5% increase in the cost of domestic gasoline to near $3.41 per gallon. That would result in an increase in the June consumer price index to a minimum of 2.6% on a year-ago basis, which could increase at a greater pace because of tariffs and exert a modest drag of 0.1% on growth in the second quarter.
- Oil Increases to $100: This scenario would result in a 15% increase in the price of regular gasoline to $3.73 per gallon and a 2.7% annual increase in the consumer price index in June, with a higher rate possible because of tariffs. The result would be a 0.3% drag on second-quarter growth.
- Oil Increases to $120: This scenario would result in a 3% increase in the year-over-year CPI as the cost of domestic gasoline increases by 20% to $3.90 per gallon and provides a 0.5% drag on overall growth in the second quarter.
Inflation expectations, interest rates and the Fed
The primary risk to the rate outlook is through inflation expectations becoming unanchored.
The New York Federal Reserve’s estimate of one-year inflation expectations stands at 3.2% and the University of Michigan estimate of one-year expectations resides at 5.1%.
Most important, should consumers push near-term expectations higher, then the Federal Reserve will almost certainly push out any notion of a rate cut until December at the earliest, or into next year.
We think that the Fed will keep its policy rate in a range between 4.25% and 4.5% at its meeting next week. A move higher in inflation would modestly impact our estimation of the Fed’s reaction function but would not be sufficient to warrant a sharp change in policy.
But a sharp change in policy would be warranted only if inflation expectations become unanchored and inflation moves decisively to the upside on a combination of tariffs and an oil-induced price shock.
Given the new tariffs and rising energy prices, the Fed should simply wait out the current volatility before acting in either direction.
On Friday, the U.S. 10-year Treasury yield moved higher, to 4.41%, as investors priced in greater inflation risks while the U.S. dollar appreciated against 14 of the 16 major trading currencies.
The takeaway
The U.S. has established energy independence, and this is one of the reasons why our shock-based scenarios result in a relatively restrained economic impact of the current events in the Middle East.
As the price of oil moves toward $70 per barrel, U.S. domestic oil producers will increase volume, dampening the overall impact of hostilities in the Middle East.
Should hostilities expand to affect other oil producers in the Middle East, then the adverse impact on the domestic price of energy would be greater than that estimated above.
