The U.S. economy, already flirting with recession risks from a trade war, now has another dangerous threat hanging over it: a potential war with Iran.
Opening another front in America’s Middle East wars could send U.S. gas prices surging and whack American consumers, who have been holding economic growth on their shoulders while businesses pare back spending. Spikes in oil prices have been associated with almost every recession over the past half century, and, until now, low fuel costs have been one of the U.S. economy’s saving graces.
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Weekend attacks on key oil facilities in Saudi Arabia — and President Donald Trump’s bellicose tweets casting blame on Iran — sent oil prices soaring Monday. The drone attacks initially pushed oil prices up nearly 20 percent, the biggest intra-day gain since the first Persian Gulf War in 1991. The sharp spike eased amid reports that the Saudis, for now, could make up much of the reduced production through reserves. Trump also suggested the U.S. could also tap its own oil stockpile if necessary.
But Trump’s Twitter comments directing blame for the strikes — initially claimed by Yemeni rebels — toward Iran and his suggestion that the U.S. is “locked and loaded” for battle kept markets on edge. Brent crude futures, the global benchmark, remained up about 10 percent at $66 per barrel in midday trading.
“Higher oil prices may be just one more nail in the coffin for this current U.S. expansion,” said Beth Ann Bovino, U.S. chief economist at S&P Global Ratings. “As it is, we are already seeing businesses being reluctant to invest given the trade headwinds and this gives them more reason to hold off.”
“If we see a rise in gas prices as result of this, which have already been creeping higher, we may see the American consumer, which has been a stalwart for this expansion and a stabilizing force for the economy overall, slow spending as well, since more money in the gas pump means less to spend for items at the mall,” she said.
The immediate impact of production cuts in Saudi Arabia should be manageable for a U.S. economy that is far less reliant on foreign markets for oil than it was during the price shocks of the late 1970s, analysts said. The deeper concern among economists and market analysts is that a full-scale shooting war with Iran could lead to much more disruption in the energy market and drive up fuel prices in the U.S., adding to inflation that is already picking up.
That could complicate decision-making at the Federal Reserve, which is now cutting rates to offset the impact of Trump’s trade wars and signals of an economic slowdown. Cutting rates would be much harder if inflation rises further.
“I increasingly think we’re watching a repeat of ‘That 70s Show,’” said Richard Bernstein, founder of investment firm RBAdvisors. “Oil issue with the Middle East, UAW strike at GM, wage pressures, core CPI rising — and regardless of all that the Fed is in easing mode.”
A fresh war in the Middle East coupled with the impact of Trump’s trade war with China and the uncertain fate of the replacement to NAFTA could all combine to further depress an American economy that grew just 2 percent in the second quarter and may grow closer to 1 percent the rest of the year, according to economists’ forecasts.
“While the initial shock of a brief oil supply reduction will be quickly absorbed by U.S. production capabilities, folks up and down the supply chain will use the attack to raise prices,” said Dan Berger, president and CEO of the National Association of Federally-Insured Credit Unions. “It will be immediately seen by consumers at the retailers’ pumps and those prices will likely stay higher for a considerable amount of time, creating an additional headwind for the economy. Historically gas prices rocket up and then very slowly come down.”
Analysts also cautioned that Trump could back off his threats toward Iran, especially given the potentially negative impact on the U.S. economy, just as he heads toward his reelection campaign next year. Trump has rattled the saber against other American adversaries only to reverse course in subsequent weeks and months, particularly since he campaigned on promises to extract the U.S. from protracted wars in the Middle East.
If tensions do ease with Iran, the attacks on the two Saudi oil fields should not have a major impact on the U.S.
“We’re amazed that most Americans don’t realize that the U.S. is energy self-sufficient; it’s one of the least appreciated economic stories of the decade,” said Greg Valliere, chief global strategist at AGF Investments, in a note to clients Monday. “The U.S. can withstand a protracted period of global energy shortages, with a minimal economic impact. The big loser could be China, which is heavily dependent on oil imports.”
Wall Street reacted fairly calmly to the attacks, with the Dow down less than 1 percent in midday trading. Investment strategists said reaction would likely stay limited unless the crisis spirals out of control.
“The concern is ‘escalation.’ That is, if it evolves into a broader military conflict which persists, that would be concerning,” said Jim Paulsen, chief investment strategist at the Leuthold Group. “However, that is probably very unlikely. Other countries can increase output to make up for a short-run shortfall from Saudi until their capacity is brought back on line.”
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