Energy
Middle East Conflict Risks Huge Oil Prices, Threat to US Economy
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24/7 Wall St. Insights
- A wider conflict in the Middle East could drive crude prices much higher.
- Oil prices affect the U.S. economy in several ways.
- Also: Dividend legends to hold forever.
Oil prices have dropped from $92 a barrel last year to $70 recently. The Wall Street Journal speculated that Saudi Arabia might push the price to $50 in a disagreement among OPEC+ nations. However, tension in the Middle East has started to reverse this trend, and a regionwide war could drive crude much higher. Large swings in oil prices affect the U.S. economy.
People tend to forget that crude rose to $100 a barrel in June 2022, driven by the Russian invasion of Ukraine. Gasoline prices in the United States back then came close to $5 for a gallon or regular. For families with commutes, this threatened to add hundreds of dollars to annual household expenses. That, in turn, erodes discretionary spending, which is among the hearts of gross domestic product.
Oil affects the U.S. economy in several other ways. The most visible are jet fuel and home heating oil. Add petrochemical-based products: plastics, rubber, paints, detergents, adhesives, pesticides, cosmetics, and dozens more. High oil prices can affect what consumers and businesses pay for many of these.
The consensus is that the Federal Reserve has broken the back of inflation. The consumer price index hovers around 3% today, and there are signs that it will go lower in the next few months. The Fed’s target was 2%. After a half-a-point cut just weeks ago, there is speculation that there will be another half-point cut between now and year-end. A jump in oil prices could undermine the chance of another cut.
A surge in crude prices due to a wider and longer war in the Middle East could disrupt the supply from the most significant producers, including Saudi Arabia. If the situation lasted more than a few weeks, America’s economy would be in trouble.
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