Almost every economic downturn of the past half-century was kicked off with soaring oil prices. President Donald Trump just bet his presidency that he can defy that history.
A full month after shipping traffic stalled in the Strait of Hormuz, Trump is heading into the most politically perilous stage of his war with Iran with three major gambles.
He’s counting on a conflict that escalates for a few more weeks before de-escalating rapidly. He’s betting the world’s most important waterway for oil will reopen quickly. And he’s hoping consumers in the U.S. and around the world will ignore the mounting damage and remain confident about the economy.
The problem with all of his bets: Much of the world is out of time. The economic toll of the war is poised to grow far more severe in the coming weeks as stopgap emergency measures from the past few weeks are exhausted.
In a speech Wednesday night, Trump promised to bomb Iran “back to the Stone Ages” — a phrase that originated during the Vietnam War — and to undertake actions that will likely embolden Iran to keep the Strait of Hormuz from reopening for several more weeks. Since more than 20% of the world’s oil passes through the strait, analysts are now bracing for the commodity to reach $150 to $200 a barrel — from around $100 a barrel before Trump’s speech began — as supply shortages become clearer.
Unless Trump reverses course, April will mark the beginning of the most severe energy crisis the world has experienced in generations.
American consumers are already reeling from gas prices jumping more than $1 a gallon in less than a month — the fastest surge in decades. Outside the U.S., crises are accelerating at a much more dangerous pace. Nations across Asia are declaring emergencies and bracing for shortages as their Middle Eastern fuel supplies run dry. Europeans are already grappling with soaring prices for natural gas, after years of trying to wean themselves off Russian energy. And Persian Gulf countries are seeing their economies shrink as their oil output collapses from the mounting damage to infrastructure.
Three basic facts about oil and gasoline prices will determine how the coming weeks go.
First, oil prices are determined globally — trouble anywhere usually means trouble everywhere, at least when it comes to the cost of oil. The president’s repeated assertion that the U.S. doesn’t need Middle Eastern oil is irrelevant in a global market.
Second, prices at the pump tend to soar like a rocket and fall like a feather. Even if hostilities were to abate, the cost of gas will stay at least somewhat elevated until the market restores its balance. That means higher prices will filter through the rest of the economy for months — hitting airlines, truckers and manufacturers and spurring them to raise prices.
Third, consumers notice gas prices more than any other product, thanks to giant signs posted at gas stations, but they generally don’t cut fuel purchases easily or quickly. The process of demand destruction — or paring back in light of lower supplies and higher prices — is a long one. That’s why high oil prices tend to cause so much damage under the surface of the economy.
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Recent history suggests oil alone may not be the tipping point for the U.S., which has proven more resilient in the past two decades as the world’s leading oil-producing nation thanks to the shale boom. But soaring gasoline prices can cause damage that’s harder to see.
High prices into the summer of 2008 strained household budgets enough that many Americans were already tapped out once the financial crisis struck in September 2008.
High oil prices leading into the U.S. invasion of Iraq in 2003 were widely seen as having slowed the recovery from the 2001 recession. President George W. Bush struggled with a so-called jobless recovery for years.
And more recently, a surge in oil prices because of the Russian invasion of Ukraine in 2022 aggravated existing inflation problems tied to the post-pandemic supply shortages. The ensuing affordability concerns that shaped the 2024 election are also plaguing Trump and his party today.
The president’s approval ratings are already at the lowest point of his two terms in office, partly for reasons beyond the economy. Gas prices tend to exact a vicious toll on approval ratings, pointing to even more trouble for his party this fall.
Trump aides spent much of last year forecasting that the economy would take off like a rocket once they got past 2025. Instead, Trump’s trade war generated uncertainty that restrained businesses and consumers.
Unless his aides defy history — extracting the U.S. quickly from a Middle East war, lowering oil prices rapidly and persuading consumers to ignore their own pocketbooks — they may come to regret those remarks soon.
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Sudeep Reddy is Washington bureau chief at MS NOW. He previously worked at POLITICO, The Wall Street Journal and the Dallas Morning News.