Oxford Economics: Prolonged High Oil Prices Could Cause the U.S. Economy to Enter a "Stagnation"

Why is the oil price critical point set at $140 per barrel?

If oil prices stay high for a long time, U.S. President Donald Trump will face multiple risks. Photo source: Heather Diehl/Getty Images

The global energy crisis triggered by the Iran conflict has caused market turbulence and driven oil prices to their highest levels in four years. As the conflict escalates, the likelihood of a quick resolution diminishes, and hopes that the U.S. economy can remain unaffected are growing dimmer.

This war has effectively blocked the Strait of Hormuz—a key energy route connecting Persian Gulf oil and gas producers to the global market. According to the International Energy Agency, the blockade has disrupted the transportation of about 20 million barrels of crude oil daily through the strait. The IEA estimates that this conflict has reduced global daily supply by approximately 8 million barrels, marking the most severe oil supply crisis in history. As a result, oil prices have fluctuated wildly. The international benchmark Brent crude was about $70 per barrel before the conflict, approached $120 last week, then retreated to the $90–$100 range.

Oil price volatility has pushed up gasoline prices in the U.S., but this may not be enough to trigger a severe recession warned by some economists. A report released last Friday by Oxford Economics states that, in the long run, the current price levels may have minimal impact on economic output.

However, this judgment is based on a premise: that oil prices can quickly fall back to pre-conflict levels within a few months. The longer the Strait of Hormuz remains blocked and the higher oil prices rise, the faster the global economy, including the U.S., will deteriorate.

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Economic Pressure Threshold

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Oxford Economics uses a common rule of thumb to estimate the impact of rising oil prices on the economy: if oil prices increase by $10 and stay elevated for about two months, it could lead to a 0.1% decline in GDP due to rising inflation and slowing economic growth. The report states that if oil prices remain at an average of $100 per barrel for two months, global GDP growth could slow by a few tenths of a percent, but a recession might still be avoided.

Oxford Economics believes the “critical point” for the economy is whether oil prices will stay at an average of about $140 per barrel over two months. Once this level is reached, spillover effects will become harder to control, and many regions worldwide will face economic downturn risks.

The authors of the report wrote: “The Eurozone, the UK, and Japan will experience mild contractions, while the U.S. economy will approach a temporary stall, with layoffs pushing unemployment higher and edging toward recession.”

Calculating the economic consequences of high oil prices is difficult because their impact has an “exponential” amplification effect. The larger the increase in oil prices, the more chain reactions it triggers in the economy. Persistently high oil and transportation costs will gradually pass through to food and other goods, turning inflation from a problem mainly in fuel and energy into a broader issue. If markets generally believe that oil prices will stay high long-term, the Federal Reserve and other central banks will be more inclined to tighten monetary policy, which could suppress economic activity.

The last complex factor is psychological. The report points out that if oil prices remain high, consumers’ expectations of sustained high prices could lead to a “collective deterioration of sentiment.” In the U.S., where car travel is common, consumers are especially sensitive to gasoline prices. Rising fuel costs will squeeze household disposable income, reduce spending elsewhere, and further slow the economy.

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Uncertain Outcomes

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According to Oxford Economics’ models, in the worst-case scenario, U.S. inflation could rise from the current 2.4% to about 5% by Q2 2026, reaching the highest level since March 2023. This inflation level could prompt the Fed to adopt a more hawkish stance and possibly raise interest rates this year. Although the Fed is likely to keep rates steady this week, many forecasters believe that rate cuts this year are unlikely due to the Iran conflict.

While the $140 per barrel scenario is a serious warning, Oxford Economics notes that the probability of this happening remains relatively low. The authors believe a more likely scenario is that oil prices will stay around $100 per barrel, consistent with most of the recent weeks’ prices. The ultimate outcome largely depends on when the conflict ends and when the Strait of Hormuz is reopened, allowing Gulf region oil and gas exports to resume. Officials from the Trump administration recently said that hostilities might take several more weeks to ease.

On Monday, after the U.S. announced a series of measures to increase supply—including temporarily easing sanctions on Russian oil exports, allowing Iranian tankers to leave the Gulf, and President Trump calling for other countries’ help in securing the strait—oil prices retreated somewhat. Additionally, the International Energy Agency coordinated the release of 400 million barrels from global emergency reserves, providing limited market buffer and helping ease market anxiety.

However, during this conflict, oil prices have already adapted to sharp fluctuations. In the early second week of the conflict, Trump stated on Truth Social that high oil prices are “a small price to pay” for achieving U.S. goals in Iran. Oil prices then surged 25% overnight, approaching $120 per barrel, but later retreated within the same week. (Fortune China)

Translator: Liu Jinlong

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