High Oil Prices Pose Multiple Risks to the U.S. Economy

A gas station price sign in Los Angeles, USA, recently photographed. Xinhua News Agency / AFP

In recent years, the United States has become a major global crude oil producer and a net exporter of oil. However, Middle East military conflicts have disrupted Strait of Hormuz transportation, pushing up international oil prices, and the U.S. itself may not be the beneficiary. Some market analysts believe that high oil prices could pose multiple risks to the U.S. economy by affecting inflation, consumption, and supply chains.

First, U.S. inflation pressures are becoming more prominent, and the expected decline in inflation has been thwarted. Although the U.S. is a net oil exporter, domestic refined oil prices are highly correlated with crude oil futures prices, and rising oil prices quickly transmit to the domestic market. Consumers have already started paying higher bills due to rising oil prices.

Antonio Gabriel, an economist at Goldman Sachs Global Economics, said that the increase in oil prices caused by Middle East military conflicts is adding upward pressure on U.S. inflation.

Second, high oil prices are unfavorable for the seasonal rebound in oil demand, putting pressure on U.S. economic activity.

As winter ends, American households, known as “the nation on wheels,” will significantly increase their vehicle fuel consumption. However, soaring refined oil prices will suppress travel demand, and rising jet fuel prices will negatively impact civil aviation transportation. Industries such as dining, shopping, and tourism will all be affected, inevitably impacting overall consumer spending in the U.S.

Third, high oil prices are impacting the U.S. stock market, with wealth shrinking potentially suppressing high-income group consumption.

Barry Bannister, Director of Equity Strategy at Stifel Financial, recently stated that sustained high oil prices will lead to an increase in the U.S. Consumer Price Index, slow economic growth, and increase credit pressures. Inflation will erode already weak real incomes, putting pressure on American consumers.

Due to escalating Middle East military conflicts, Ed Yardeni, President and Chief Investment Strategist of Yardeni Research, has raised the probability of a stock market crash in the U.S. this year from 20% to 35%, while lowering the chance of a significant rise from 20% to 5%.

Finally, expectations of high oil prices further delay the Federal Reserve’s interest rate cuts, putting pressure on the real estate market and macroeconomic stability.

The Federal Reserve has entered a wait-and-see phase after three rate cuts in the second half of 2025. The market initially expected that after the new Fed Chair took office in May, there would be another rate cut mid-year. However, with rising inflation expectations, investors now estimate that the next rate cut will be delayed from July to September.

Some analysts believe that the inflationary pressures and economic slowdown caused by high oil prices will lead the U.S. to face stagflation—weak economic growth combined with high inflation. Once stagflation becomes entrenched, the U.S. economy could fall into a difficult situation.

Yardeni believes that the U.S. economy and stock market are suffering from Middle East military conflicts, and the Federal Reserve is also affected. If high oil prices persist, the Fed’s dual goals of controlling inflation and supporting employment could become a dilemma.

As a commodity, it is not surprising that oil prices fluctuate significantly due to geopolitical risks. However, if geopolitical tensions are not alleviated in time, the risk premium on oil will remain high, and oil prices will struggle to return to pre-conflict levels.

(According to Xinhua News Agency, reporter Liu Yanan)