Economy Will Not Absorb This Oil Shock

AB: A review and forecast of what is happening and what will happen over the next few weeks due to the oil shortage brought on by Trump’s attack on Iran. The impact of which, Trump’s blunder will cause many more issues economically. This is not Venezuela.

“The Economy Doesn’t Have the Room to Absorb This Oil Shock,” Roosevelt Institute

Briefly . . .

The energy picture over the last year shows an unusual split. OPEC drove oil prices down for much of 2025. Domestic energy prices rose. Looking backward at February CPI, energy inflation was up 0.5 percent over the year, with 10.9 percent inflation for natural gas and gasoline prices down 5.6 percent, mostly offsetting 4.8 percent electricity inflation.

Since the beginning of the year, oil prices climbed more than 10 percent as the threat of war increased. Now, the closure of the Strait of Hormuz is essentially the worst-case scenario for energy markets. Things can get better or worse based only on how long it stays closed.

The energy shock is showing up aggressively in some markets and not others. This is based largely on how much energy was in storage already. For example, while an underfilled US Strategic Petroleum Reserve is having no price effects yet, more acute price shocks have already hit EU natural gas and US diesel, where storage levels were low before the shock.

At the broader level however, this is a major oil shock for everyone. There is essentially no difference between US and EU oil prices in response.

Global reductions in oil and natural gas supplies are both around 20 percent. The US is the largest producer of both. Yet the effect on US prices have been polar opposites. US oil is tightly integrated in the global market. Prices of US oil rise when Persian Gulf oil goes offline as more oil is then exported from US shores. The US exports less than 1 percent of its natural gas production and is already at capacity Disruptions in the Gulf do not affect US natural gas prices. Relying primarily on domestic natural gas is not costless. Winter storms drove a large spike in natural gas prices in January. The wildly different response to what may become the largest energy shock in history shows two very different outcomes for average people in the world’s largest fossil fuel–producing country.

A less-appreciated risk increasingly emerging across the Gulf is recovering from this disruption will not be easy. While oil wells can be shut in or temporarily closed, oil fields have no true pause button. Recovering oil from existing wells depends on  geological pressure to push a mixture of oil, gas, and water to the surface. Shutting in a well can reduce pressure, change the mix of what comes up, and/or degrade parts of a well, causing permanent reductions in future production. Historically, this means oil production from existing wells is more driven by geology than prices. Cutting output risks years of future losses. This means that even restarting every shut-in well would imply a sizable production shortfall for some time after the Gulf goes back to its prewar state.

Earlier phases of US shale production appeared to insulate against disruptions,  capitalizing on high prices  to expand output. Because the rate of shale oil production is rapid and declines quickly, this could offer a production reserve in case of events like this month. However, that price responsiveness didn’t show up in the supply shock caused by Russia’s invasion of Ukraine, and is unlikely to materialize here.