Capital Economics estimates that if crude oil prices rise to around $100 per barrel, the effect on the U.S. economy would be contained and "not particularly bad news," thanks largely to the country's position as a modest net energy exporter.
Stephen Brown, deputy chief North America economist at Capital Economics, said in a research note this week that while elevated oil prices would push consumers to cut back on spending outside energy, the lost expenditure would be at least partly offset over time by stronger incomes and activity in oil-producing regions, or "the oil patch." He described the immediate impact on real GDP growth as "modestly negative."
The note evaluates three potential price trajectories for West Texas Intermediate (WTI):
- a short-lived disruption that would see WTI return to roughly $60 per barrel,
- a more sustained conflict keeping prices above $100 for several months, and
- an extreme outcome in which lasting damage to energy infrastructure pushes crude toward $150 per barrel for at least six months.
Capital Economics pointed to recent market moves, including a sharp drop to about $80 per barrel, as suggesting the economy may be on a path closer to the first scenario. Nevertheless, the firm examined in detail the second scenario, in which WTI averages about $100 for the balance of the year.
Under that path, Brown projects headline consumer price inflation to increase from 2.6% in January to 3.3% by December. He also expects some upward pressure on core inflation driven by energy-sensitive categories such as airline fares. Consumer spending would slow as a result of higher energy costs, but the firm characterizes that slowdown as modest.
On monetary policy, Capital Economics judges that the Federal Reserve would be more likely to pause planned rate cuts than to resume raising policy rates if oil averages near $100. The firm notes, however, that in an extreme scenario where oil climbed toward $150, some more hawkish Federal Reserve officials could press for "one or two 'insurance hikes'."
Sectors and market channels affected: Households through disposable income and consumption patterns; energy-producing regions through higher income; energy-sensitive services such as airlines via fare increases; and monetary policy deliberations at the Federal Reserve.