Middle East Conflict Triggers Oil Price Surge: When Will It Drag Down the U.S. Economy?

What is the basis for the calculation of the oil price critical point at $138?

The Wall Street Journal’s survey of 50 economists shows that, on average, the probability of a U.S. recession in the next 12 months is only 32%. It would take oil prices reaching $138 and remaining at that level for 14 weeks to push the recession probability above 50%.

Unprecedented disruptions to oil supply caused by the war in Iran have driven up crude oil and other commodity prices significantly. However, economists still believe that the risk of a U.S. recession is not high.

The Wall Street Journal’s survey of economists conducted from March 16 to 18 indicates that the market generally believes that if this oil shock is only temporary, inflation will rise temporarily, while economic growth and unemployment rates will remain largely unchanged.

Bernard Baumohl of The Economic Outlook Group said, “Considering ongoing conflicts in the Middle East, soaring oil prices, high tariffs, artificial intelligence, and strict immigration policies, the resilience shown by the U.S. economy so far is noteworthy. But we must not take this resilience for granted.”

The survey collected responses from 50 economists from Wall Street banks, universities, small consulting firms, and other institutions, but not all respondents answered every question.

Economists estimate that the probability of a U.S. recession in the next 12 months is 32%, slightly up from 27% in January. When asked what level of oil prices would push the recession probability above 50%, economists provided a range of $90 to $200 per barrel, with an average expectation of $138. When asked how long high oil prices would need to persist, responses ranged from 4 to 55 weeks, with an average of 14 weeks. On Wednesday, U.S. crude futures closed at $96.32 per barrel, compared to an average of about $65 in February.

Robert Fry of Robert Fry Economics currently estimates the probability of an economic downturn at 40%. He states that reaching $125 per barrel and maintaining that level for 8 weeks would be a key critical point in his assessment.

He said, “My forecast is based on the assumption that the Strait of Hormuz will fully reopen to oil tanker traffic by mid-April. If that cannot be achieved, oil prices will rise sharply, and I will incorporate a recession into my forecast.”

On average, economists expect that the inflation-adjusted U.S. Gross Domestic Product (GDP) will grow by 2.1% year-over-year in Q4, slightly down from 2.2% in January. They project the December unemployment rate at 4.5%, consistent with pre-conflict forecasts in January. The U.S. unemployment rate last month was 4.4%.

Unlike growth forecasts, economists are more pessimistic about inflation prospects. They expect the Consumer Price Index (CPI) to rise by 2.9% year-over-year in December 2026, up from their January forecast of a more moderate 2.6%.

This upward revision is not solely due to rising gasoline prices: economists now expect that the core Personal Consumption Expenditures (PCE) price index, which excludes volatile food and energy prices, will increase by 2.8% year-over-year in Q4, higher than the 2.6% forecast in January. The PCE is the Federal Reserve’s preferred inflation measure.

Rising inflation expectations have also dampened expectations for rate cuts. On Wednesday, the Federal Reserve kept the target range for interest rates at 3.5% to 3.75%. On average, economists now expect the midpoint of this range to be 3.26% by year-end, implying 1 to 2 rate cuts of 25 basis points each during the year. In January, their median forecast was 3.08%, corresponding to two rate cuts.

This aligns economists’ expectations more closely with those of Federal Reserve officials. The Fed’s projections released after Wednesday’s rate decision indicate policymakers generally expect one rate cut of 25 basis points this year. Their GDP and unemployment rate forecasts have changed little since December, but inflation expectations have been raised.

Fed Chair Jerome Powell told reporters on Wednesday that given the uncertainty surrounding the outcome of the conflict, these forecasts have limited significance. He said, “We have no idea how this will turn out. So what we write down are just seemingly reasonable judgments, but we are not fully confident in them.”

Several economists also expressed similar uncertainties. Beth Ann Bovino of S&P Global Ratings said her forecast was made at the onset of the conflict, and “the situation is changing every hour.”

The Strait of Hormuz transports about 20 million barrels of oil daily, accounting for 20% of global supply, and current transit volumes have significantly decreased. As a result, oil prices recently rose above $100 per barrel. According to AAA, the average retail gasoline price across the U.S. on Wednesday was $3.84 per gallon, up from $2.92 a month ago. Wholesale futures prices for gasoline suggest that retail prices could rise sharply above $4 in the coming weeks.

Economists expect that oil prices will close at $86.70 in June and $73.54 by the end of the year. An economist from the University of California, Los Angeles, said, “The U.S. has been the world’s largest oil producer since 2018… From an overall economic perspective, oil prices of $80 to $100 per barrel are not all negative. In 2008, inflation-adjusted West Texas Intermediate crude oil prices reached $200 per barrel.”