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The US has spent the past two decades insulating itself from oil price shocks, Deutsche Bank chief US economist Matthew Luzzetti wrote in a recent note to clients. But as three charts from Luzzetti show, the current oil shock from the war in Iran may still have rippling economic effects.
The US is the leading exporter of crude oil, though the commodity is globally priced, and events in one corner of the globe are felt worldwide. Over the past nine weeks, the US overtook Saudi Arabia as the world’s largest exporter of the bedrock energy product, according to Bloomberg, as data from the Energy Information Administration shows weekly exports have surged to record highs.
That said, the US is not truly energy independent.
As the chart below shows, while the US is a net exporter of petroleum products generally, a category that includes crude oil and refined products, it is a net importer of the underlying crude oil.
That’s because while US shale oil is primarily light, sweet crude, the refinery complex along the US’s Gulf Coast is designed primarily to handle heavy crude imported from Canada and a few other countries.
Yet despite the US’s relatively strong position on energy reliance, oil price spikes have swift consequences domestically. Prices on both international Brent crude (BZ=F) and US WTI crude (CL=F) oil are up roughly 50% since the start of the war, even after pulling back from wartime highs by some $20 each.
Those increases have sent gasoline prices soaring. The national average now sits at roughly $4.48 per gallon at the pump as the war in Iran has stymied global oil flows, according to AAA. A year ago, that price was just over $3 per gallon.
Those costs directly feed into consumer spending. As the second chart below shows, the Personal Consumption Expenditures index has been rising as inflation has remained above the Fed’s 2% target rate.
Headline prices rose by 0.7% in March over the previous month, according to PCE data released April 30 by the Bureau of Economic Analysis. "Core" PCE, which excludes the more volatile food and energy categories, rose 0.3% on the month.
On an annual basis, the headline and core PCE price indexes rose 3.5% and 3.2%, respectively, in March from the previous year, in line with expectations on both measures.
But inflation isn’t the only concern. Oil shocks tend to hit the economy — and the consumer — from a growth perspective as well.
Higher oil prices can push up headline inflation and, if sustained, feed into underlying price pressures — strengthening the case for keeping borrowing costs elevated. At the same time, rising energy costs act as a drag on household spending and corporate margins, potentially slowing economic activity and complicating the path for interest rates.
Historically, Luzzetti wrote, economic recessions have been accompanied by oil price shocks, including the 1973 to 1975 recession and the lead-up to the 2008 global financial crisis, as the third chart below indicates.
Most economists are not calling for a recession, but major Wall Street firms have warned that while energy-driven inflation is capturing headlines now, the bigger worry down the road could be economic growth.
Jake Conley is a breaking news reporter covering US equities for Yahoo Finance. Follow him on X at @byjakeconley or email him at jake.conley@yahooinc.com.
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