America may be a petrostate. But the energy shock still hurts

For Americans of a certain age, and macroeconomists of all ages, the 1970s carry a lingering trauma. Then as now, petrol prices spiked after tumult in the Middle East. Inflation soared; growth slumped. Cars queued at parched petrol stations and the ugly word “stagflation” entered the vernacular. The parallels to Donald Trump’s war in Iran hardly need drawing. Nearly three weeks after American and Israeli bombs started falling on Tehran, oil prices are up by half and the Strait of Hormuz, through which a fifth of the world’s crude normally passes, is all but shut.

For all the historical rhymes, that era is not an ideal guide to the present day. The shale-fracking revolution ignited in the 2010s turned America from a net importer of energy to a net exporter by 2019, for the first time in more than 60 years (see chart 1). In recent years American liquefied natural gas (LNG) has started supplying global markets, too. Uncle Sam now ships lots of both oil and gas abroad. Before the war Europe was getting more than half its LNG from across the Atlantic. At regasification terminals around the continent, European pain is transmuted into American profit.

Still, unlike a proper petrostate, America will not emerge from the crisis as an outright winner. For its highly diversified economy, a sudden shortfall in the fuel that powers nearly every car, lorry and aeroplane will deal a blow. Goldman Sachs, a bank, reckons the war in Iran will nudge American GDP growth this year down by 0.3 percentage points to 2.2%.

More importantly, the aggregate figure conceals huge disparity of outcomes for different constituencies. The shock is already reshuffling American prosperity: from coasts to the oil patch, from airlines to the energy majors and, most significantly, from the poor to the rich. Each of those shifts will cause palpable economic and political reverberations.

Take the 50 states. American GDP growth slowed after the last big oil shock, when Russia’s invasion of Ukraine in 2022 roughly coincided with the Federal Reserve’s sharp increases in interest rates to fight stubborn post-pandemic inflation. Most states’ output braked. But Texas hit the gas. So did Alaska, New Mexico and a clutch of other places with fossil-fuel economies (see chart 2, top panel).

The gap may be wider this time. Windfall profits generated by energy firms in 2022 and 2023 helped cause another wave of investment in hydrocarbon production, which can now be put to use. America’s LNG export capacity, much of it in Texas and Louisiana, is a third larger than it was then and is set to grow by another 10% or so by the end of the year. Oil production has risen by half in the past decade.

The effect on American businesses will be similarly lopsided. The benchmark S&P 500 index of large American firms is down by almost 4% since war broke out. Of the 11 large sectors, ten have declined (by anywhere between 1%, for information technology, and 10%, for materials). The energy sector, by contrast, has gained more than 4%; its second-biggest firm, Chevron, is up by 6% (chart 2, bottom panel).

Even America’s technology giants, which have been fuelling the S&P 500’s relentless rise, are not invulnerable. In the past few years they have moved out of the ethereal digital realm and into the physical world of power-hungry artificial-intelligence data centres. Sky-high energy prices could imperil those AI clouds. Data centres’ putative effect on electricity costs has become a flashpoint for political opposition. If power prices soar, local governments will surely be less willing to risk the ire of bill-sensitive constituents than deep-pocketed tech bosses.

If investors are spooked by the prospect of prolonged Hormuz disruption, this would result in an even bigger wealth transfer to energy firms’ shareholders. A big sell-off could dent overall growth, which has been fuelled in part by stockmarket gains that have made many Americans feel better off and readier to spend. It could also gum up hundreds of billions of dollars in planned AI investments, which have been helping to lift the economy in recent quarters.

The most profound intra-American redistribution will occur between the less affluent and the loaded. The lowest-earning fifth of Americans devote nearly twice as much of their spending to petrol and electricity as the top-earning fifth. Whereas the rich can absorb the shock, poorer Americans must cut back purchases of other things in order to fill up their cars and pay their power bills. The longer they do so, the bigger the hit to their welfare. Adding insult to injury, the extra cash they spend on petrol and power goes via oil firms’ income statements into the pockets of the share-owning class.

Worse still, the oil shock is colliding with an economy that, fairly or not, Americans already hate. Although the country is nowhere near a recession, consumer confidence languished near record lows even before the energy crisis. The Democratic Party was already taking Mr Trump’s Republicans to task over the “affordability crisis” which has been angering voters despite the fact that their wages have been growing faster than prices. If the oil shock turns these misperceptions into reality, the backlash could be fiercer—especially if it is compounded by rises in interest rates by the Fed, should it fear that inflation was once again getting out of hand.

Least popular of all will be the rise in petrol prices, which glare down at Americans whenever they pass a service station. Neale Mahoney, Ryan Cummings and Giacomo Fraccaroli, a trio of economists at Stanford University, find that once prices pass $3.50 per gallon, media interest in the topic explodes (see chart 3). They are already nearly $4, up from less than $3 before the war. If the Strait of Hormuz stays shut and oil prices jump again, $5 is not out of the question.

In the past week Mr Trump and other Republicans have tried arguing that the energy shock is good for America now that the country is a net fuel exporter. Such assurances will do little to mollify voters if they are still paying through the nose before the midterms in November.

Research shows that pre-election prices at the pump are strongly correlated with the performance of the party in power at the ballot box. This time expensive petrol would rile up an electorate already furious about the cost of just about everything else. The war’s clearest winners may well be neither America nor Iran, but an unlikely pairing of oil companies and congressional Democrats. ■