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A critical oil market indicator is sounding alarms for the U.S., sparking concerns about a looming significant economic slump.
Throughout the week, analysts have been abuzz over findings that reveal a pattern: when oil prices climb over 50% above their long-term average, a recession is often not far behind.
This indicator’s track record is unsettling. In the past five decades, there have been six instances of oil price spikes, each followed by a recession.
This week, Brent crude – the global benchmark for oil prices – soared to four-year peaks, surpassing $110 per barrel. This surge was fueled by escalating tensions involving Iran, the strategic Strait of Hormuz, and ongoing ceasefire negotiations.
Efforts to de-escalate the situation helped ease prices as the weekend approached. However, international crude prices spiked to $113 on Tuesday, comfortably exceeding the 50% threshold above its long-term trend.
‘The longer oil prices remain elevated, the worse the trade‑offs become, with softer growth and labor outcomes, and stickier inflation,’ Christian Hoffmann, head of fixed income at Thornburg Investment Management, told the Daily Mail.
Oil prices are far from the only recession alert these days: Top economist Gary Shilling recently warned almost nothing could stop a US downturn later this year, and legendary hedge fund manager Ray Dalio said the US economy was already in hot water.
But surging crude is the biggest threat to the economy right now, so much so that the Trump administration is working overtime to extract the US from the Iran conflict and force down prices.
The 1973 recession arrived after oil prices spiked due to an OPEC oil embargo, causing widespread fuel shortages throughout the US
Christian Hoffmann, head of fixed income at Thornburg Investment Management
The question remains whether the damage is done and the surge would lead to a seventh accurate recession prediction for this indicator.
When crude prices rise rapidly, the damage ripples throughout the economy, pushing up prices across the board.
Gasoline, air fares, shipping and food products – to name only a few key products and services – become more expensive, and that pushes up the cost of doing business throughout the economy.
It also leaves families with less cash to spend, and poses a very tough decision for the nation’s central bank, the Federal Reserve: Cut interest rates to protect jobs, or keep them high to stop another flare up in inflation.
Oil price shocks were the primary cause of multiple recessions in the 1970s, early 1980s and early 1990s – all of which saw international crude prices 50 percent above their long-term trend.
But other recent downturns, including the 2001 recession and the global financial crisis, weren’t directly caused by a sharp rise in oil prices.
These later recessions may have been accompanied by oil price spikes, but the main driver of the downturns was a bursting stock market bubble.
‘The relationship between oil and the economy is less clear this time around because geopolitics are driving energy prices instead of normal economic cycles,’ David Russell, global head of market strategy at TradeStation, told the Daily Mail.
Oil prices spiked ahead of the 2008 financial crisis, although experts say they were not a primary cause of the recession that lasted for 18 months in 2008-2009
Tracy Shuchart, senior economist at NinjaTrader
‘Americans don’t like $5 gasoline, but they can afford it,’ said Russel. ‘Adjusted for inflation, we are still well below 2008 levels.
Luca Paolini, chief strategist at Pictet Asset Management, first published the chart being passed around this week back in 2022, when a huge crude oil price spike caused by Russia’s invasion of Ukraine threatened markets with recession.
This time around, Paolini told us that international crude prices would have to remain higher for longer to make a downturn happen.
‘Oil prices above $120 until the end of summer, which implies the Strait of Hormuz remains closed until then, would trigger a recession,’ Paolini told the Daily Mail.
Russell believes the world would probably have an oil glut without the Iran crisis, and says that while higher oil prices are slowing the global economy, they’re not yet derailing the US economy, which remains strong because of huge spending on AI.
In his recent recession call, Shilling focused on the huge pressures that are hurting consumer spending, which fuels roughly two-thirds of the US economy.
He was especially unsettled by energy prices rising 12.5 percent year-over-year in March, driven high by the conflict in Iran.
Tracy Shuchart, senior economist at NinjaTrader, doesn’t disagree with Shilling, noting that the poorest 20 percent of US households spend vastly larger shares of their income paying for gasoline and heating than the richest Americans.
Explosions in Tehran marked the opening phase of the US and Israeli war with Iran, which has sent global oil prices surging higher
‘Energy is a regressive cost,’ Shuchart told the Daily Mail. ‘Wage growth at the lower end does not keep pace with energy inflation, and the pass through into food and goods – through diesel and fertilizer costs – hits poor households a second time.’
That is exactly the dynamic that McDonald’s, Domino’s Pizza and Wingstop have been talking about on all their recent earnings reports.
But Shuchart points out that the US of today has a very different economy than it did during earlier downturns that were foreshadowed by oil price spikes.
That’s because it has become the world’s largest oil producer – in addition to being the largest oil consumer.
‘There’s a lot of research from people smarter than me that has shown that right now, the number to watch is around $140 a barrel,’ Rob Spivey, director of research at analyst firm Altimetry, told the Daily Mail.