How Surging Oil Prices Could Crack the US Economy
The Hamilton Trigger suggests US$95 a barrel crude will hit households hard.
This article written by Phil Rosen, co-founder and editor of Opening Bell Daily, was originally published on Inc.com.
Oil prices will determine whether the Iran conflict becomes an economic problem.
If crude stays elevated long enough, the conflict stops being a geopolitical headline and becomes perceived as a new tax on everyday households.
Energy shocks typically make themselves known across the economy not because of direct supply shocks, but through the squeeze they put on consumer spending.
When gas prices rise, disposable income falls.
And the spending power that shifts from everyday Americans to energy corporations tends to circulate far slower back into the real economy. Neil Dutta, head of economics at Renaissance Macro, told me on Full Signal that this dynamic matters more now, because households have little financial cushion.
Real income growth excluding government transfers has barely risen over the past year, leaving consumers vulnerable to even small increases in fuel prices.
The usual forecasts suggest a spike in oil prices like the recent move catalyzed by the Iran conflict would shave off a tenth or two from annualized gross domestic product (GDP) growth. But those models, Dutta said, assume that households have enough savings on hand to withstand high prices.
With savings already drawn down, the hit to consumers could be more severe than previous cycles.
To be sure, there’s no exact price level where oil suddenly snaps the economy.
The relationship tends to be non-linear—consumers often tolerate gradual increases at the pump until, effectively overnight, prices become too steep, and spending behavior changes abruptly.
According to the so-called “Hamilton Trigger,” the switch flips once oil prices exceed their highest level from the last three years.
Today, that suggests crude would need to hit roughly US$95 a barrel for consumers to respond quickly and negatively, according to Dutta.
On Thursday, Brent crude topped $80 a barrel to mark its largest one-day gain since May 2020.
“A non-linear spike in oil prices will crush spending, but the linear increase we have now is bad enough,” Dutta said.
