The Real Economy

The U.S. is in a better position to endure an oil and gas shock

July 22, 2025

Key takeaways

The U.S. has been a net exporter of oil since 2019, due to a surge in production.

This resilience will help the U.S. economy weather the impact of any increase in global energy prices.

Overall, the impact of volatility in energy markets will be muted, but risks remain.  

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Economics The Real Economy Energy

The U.S. has been a net exporter of oil since 2019 and energy-independent for most of the past 15 years.

Now, with hostilities having broken out in the Middle East, this resilience will help the U.S. economy weather the impact of any increase in global energy prices.

Still, the U.S. is not immune to volatility in global energy markets.

About 20% of oil and natural gas flows through the Strait of Hormuz, and Iran still produces 3% of global oil supplies.

Because the region remains a vital component of global energy markets, any disruption in energy trade affects American consumers.

Higher oil prices mean higher prices at the pump, which pushes up inflation and, if sustained, restrains economic growth.

Every $10 increase in the price of a barrel of oil should result in a 0.2 percentage-point increase in inflation and cause a 0.1% drag on overall growth.

If oil prices are pressured higher—an uncertain assumption—the consumer price index would increase and economic growth would decline.

Overall, the impact on the U.S. economy will be muted, but the risks of the conflict expanding remain. 

Energy independence

Domestic oil dynamics imply that production volume will increase, as the price of oil has passed $70 per barrel.

The price of West Texas Intermediate oil—the domestic benchmark—had dropped to around $60 to $65 this year, near the average breakeven price for much of U.S. crude oil production.

That breakeven level is a reflection of domestic energy independence, as American oil production now stands at 13.4 million barrels per day—22% higher than five years ago.

The drop in prices stemmed from an anticipated global economic slowdown following the shift in U.S. trade policy, which is expected to restrain oil demand while global oil supplies remain strong.

In response to the lower price outlook, oil producers had cut back on their drilling. But that is likely to change with the $70 level having been exceeded.

Quickest to capitalize will be small to midsize producers, which tend to be more agile than larger ones and are better positioned to respond to higher prices. 

Scenarios: Oil, gasoline, inflation and growth

The following scenarios describe three different potential price increases. In our estimation, each scenario, given the risks around rising geopolitical tensions and new tariffs, shows the risk of higher gasoline prices, higher inflation and a greater drag on growth.

  • Oil Increases to $80 per barrel: A $12 increase in the price of domestic oil from the $68.04 close on June 12 should result in a 5% increase in the cost of domestic gasoline, to near $3.41 per gallon. That would raise the June CPI to a minimum of 2.6% on a year-ago basis, resulting in a modest drag of 0.1% on growth in the second quarter. But tariffs could accelerate that increase in CPI and increase the drag on growth.
  • Oil Increases to $100 per barrel: This scenario would result in a 15% increase in the price of regular gasoline, to $3.73 per gallon, and a 2.7% increase in the June CPI compared to a year ago, with a greater CPI increase possible because of tariffs. The result would be a 0.3% drag on second-quarter growth.
  • Oil Increases to $120 per barrel: This would result in a 3% increase in the year-over-year CPI, with the cost of domestic gasoline increasing by 20% to $3.90 per gallon, creating a 0.5% drag on overall growth in the second quarter.

 

Inflation expectations, interest rates and the Fed

The primary risk to the interest rate outlook is that inflation expectations will become unanchored.

In June the Federal Reserve Bank of New York’s estimate of one-year inflation expectations stood at 3.2%, and the University of Michigan’s was at 5.1%.

If consumers push near-term expectations higher, then the Federal Reserve will almost certainly push out any notion of a rate cut until December at the earliest.

But a sharp change in policy would be warranted only if inflation expectations become unanchored and inflation moves decisively to the upside due to tariffs and rising oil prices.

The Fed should simply wait out the current volatility before taking action on interest rates.

The takeaway

The U.S. has established energy independence, which is a major reason why our shock-based scenarios result in a relatively restrained economic impact from the current events in the Middle East. 

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