The pendulum of the mind oscillates between sense and nonsense, not between right and wrong.
Art Imitating Life
The past 12 months have been torrential, marked by both domestic and geopolitical challenges. Onshore, the U.S. has grappled with a contentious immigration policy and the rollout of a new tariff regime. Abroad, U.S.–Europe relations have splintered, a Venezuelan dictator was taken down, and even the prospect of a Greenland takeover entered the political conversation. All of this has been punctuated by a controversial war in Iran.
Perhaps it’s ironic that this year’s Academy Award for Best Picture went to a film depicting a continuous cycle of struggles and challenges without reprieve, One Battle After Another.
A few months ago, the U.S. entered 2026 with significant economic momentum; GDP and productivity growth were accelerating, the U.S. fiscal deficit showed improvement from the prior year, and inflation was steadily moderating. That picture looks considerably different now. Economic growth targets are being cut across the board, a SCOTUS ruling on the tariffs is readjusting the fiscal outlook, and inflation expectations are spiking due to the blockage in the Strait of Hormuz.
Nonetheless, the response to the war so far has been one of deep concern, but not panic. The stock market correction has been relatively orderly, and long-term inflation expectations have remained anchored for now. That could certainly change, however, should the conflict spread or if oil spikes higher and remains elevated for an extended period.
Biggest Oil Disruption in History
The Iran War has effectively blocked the world’s most crucial oil chokepoint, the Strait of Hormuz. Traffic through the strait, which provides transit for 20% of the world’s oil trade, has collapsed, resulting in the largest oil disruption in history.
According to Rapidan Energy, the Iran War has been particularly disruptive because it has caused a simultaneous supply shock and buffer shock. Historically, Saudi Arabia and the UAE have been primary holders of spare oil capacity. With both countries being cut off from the global oil markets, the industry’s traditional shock absorber is no longer available. Even during the Suez Crisis of 1956-57, the United States and other major Gulf nations held spare capacity equivalent to 35% of the world’s oil supply. Without that mechanism to offset the disruption, the International Emergency Agency (IEA) and the U.S. Department of Energy announced the release of 400 million and 172 million barrels of oil from their respective reserves.
A Supply Shock
IEA Chief Fatih Birol echoed the historic impact of the current war, remarking, “When you look at [1973 and 1979], in both of them we lost each about 5 million barrels per day of oil. These oil crises led to global recession in many countries… Today, we lost 12 million barrels per day — more than two of these oil crises put together.” Birol also warned that the loss of oil in April will be far more severe than March, explaining that some cargo ships carrying oil and gas were already transiting out of the strait before the war broke out. “In April, there is nothing. The loss of oil in April will be twice the loss of oil in March. On top of that you have LNG [liquified natural gas] and others. It will come through to inflation, I think it will cut economic growth in many countries, especially emerging economies. In many countries the rationing of energy may be coming soon.”
US: Less Exposed but not Immune
The United States, which had been oil import-dependent for decades, transformed itself into an energy powerhouse – becoming the world’s largest oil producing nation since 2018. Fracking technology, which triggered the Shale Revolution, has enabled U.S. oil production to nearly triple since 2008.
At this point, it may surprise some that the U.S. now produces slightly more oil each day in total volume than it consumes. Yet despite this achievement, the U.S. remains the second largest importer of oil in the world, behind only China.
This apparent contradiction reflects a mismatch between U.S. production and refining equipment. Much of the oil produced domestically—particularly from shale—is light and sweet, while a large portion of U.S. refining infrastructure is optimized for heavier, higher-sulfur crude. As a result, the U.S. continues to import lower-cost dense crude oil while exporting higher-margin lighter oil. While this has been ideal from a profitability standpoint, it does expose the U.S. to the global oil market.
Over 60% of the U.S.’s crude oil imports came from Canada last year with the next largest share coming from Mexico and South America. Only around 8% of oil imported into the U.S. came from the Middle East in 2025.
Transitory Inflation - Sound Familiar?
Global oil prices have surged sharply. Brent crude rose 63.3% in March, marking its largest monthly increase since 1988, when the data first started being tracked. U.S. benchmark West Texas Intermediate (WTI) climbed 51.3% over the same period—its biggest monthly gain since May 2020.
Unsurprisingly, that shock has rippled through the global economy and quickly fed into inflation expectations. One-year and two-year breakeven inflation rates, which are market-based measures of expected inflation, jumped to their highest levels in nearly four years.
Further out the curve, however, the reaction has been more muted. Ten-year breakeven inflation has edged up only modestly, from 2.25% to 2.31%. In essence, markets are pricing in a dramatic but temporary inflation impulse rather than a sustained shift in the long-term inflation trend.
Federal Reserve policy expectations have shifted just as quickly. As recently as January, Fed funds futures were pricing in more than two rate cuts by the end of 2026. By the third week of March, that view had reversed – markets were pricing in no cuts and even roughly 50/50 odds of a rate hike.
The prospect of a rate hike was recently dialed back by remarks from Federal Reserve Chair Jerome Powell, who pushed back against tightening expectations. He suggested a more measured response as policymakers assess the persistence of this supply-driven shock. Having dealt with the economic fallout from supply chain blockages during the pandemic, the Federal Reserve will be tested once again.
Whether the Fed ultimately treats this episode as another “transitory” inflation shock or responds more forcefully will depend on how long energy prices remain elevated and whether second-order effects begin to take hold.
Dimming Growth Outlook
The blockage of the Strait of Hormuz represents not just an oil shock, but disruptions to other critical inputs as well. Approximately 30% of international fertilizer trade passes through the strait, which is already putting upward pressure on food prices. In addition, roughly one-third of the global helium supply also passes through the strait—an essential input for semiconductors, AI chips, and electronic components.
These overlapping supply shocks, if left unchecked, could drive up production costs and constrain output, leading first to hiring slowdowns and eventually to layoffs – a classic recipe for stagflation.
According to a recent survey by the National Association for Business Economists (NABE), roughly two-thirds of economists have already lowered their 2026 growth forecasts since the war began. Many have reduced their projections by roughly 0.25–0.50% and are assigning higher probabilities to a recession. However, at this stage, an imminent recession is still not generally the base case.
Some Key Economic Indicators Remain Stable
The trajectory of the U.S. economy has clearly changed. The outlook has shifted from healthy growth to fragile slowdown with rising downside risk.
However, several key U.S. economic indicators continue to show more resilience than would typically be expected ahead of an imminent recession.
The U.S. labor market, for example, remains stable. While job growth has slowed meaningfully, layoffs have also remained low. Even one month into the Iran war, initial jobless claims for the week ending March 28 declined to 202,000, keeping within a tight range of roughly 200,000–230,000 so far this year—a range economists generally associate with a low-hire, low-fire environment.
Similarly, while overall consumer spending has begun to moderate, it has not fallen sharply. Consumer spending has been increasingly uneven in this K-shaped economy; the war in Iran will be a critical test for the US consumer.
Additionally, although there has been some concern surrounding the private credit market, banks are generally well capitalized, and credit markets continue to function smoothly overall. Moreover, due to its substantial domestic production and predominantly services-oriented economy, the U.S. is far less vulnerable to oil shocks than in the past.
Europe and Asia are Vulnerable
The same is not necessarily true for Europe. Approximately 17% of the region’s crude oil is imported from the Middle East. While this represents only a portion of total supply, Europe lacks the same economic capacity as the United States to buffer against such shocks.
Asia, by comparison, is far more reliant on Middle Eastern oil. The region depends heavily on imports, the majority of which pass through the Persian Gulf – and, by extension, the Strait of Hormuz. While both the U.S. and Europe are exposed to oil price shocks, Asia could face actual physical supply disruptions.
A Swinging Pendulum
For now, the current economic environment is engaged in a tug-of-war between a severe, man-made supply shock and an economy that is increasingly fragile but not yet broken.
This calamitous event will prove to be transitory only if energy prices stabilize, supply chains adjust, and growth reaccelerates. This hopeful outcome, however, is fragile. The longer the disruption persists or the wider the conflict spreads, the greater the risk that stagflation becomes entrenched. Such a scenario would impose a lasting effect on wages, broader prices, and ultimately, economic behavior.
Investors would do well to remain level-headed. There will inevitably be competing narratives between economic crises and soft landings, along with accompanying panic and euphoria. While markets may swing in the coming days, it is best to observe the swings rather than allow ourselves to be swung.
