Higher gas prices are the least of our problems

OPINION:

The thinking among economists is that a moderate jump in oil prices instigated by the war with Iran shouldn’t cause a recession for the U.S. economy. President Trump says a temporary spike in the cost of oil is a small price to pay to secure peace.

Don’t bank on the economists, but Mr. Trump is right.

In February, Brent crude cost $71 a barrel, and the national average price of a gallon of gasoline was $3.04. Each $10 increase in oil should push up gasoline prices by about 15 to 20 cents per gallon. That hurts working families, but gasoline and diesel represent only about 3% of the consumer price index, and that money doesn’t leave the economy.

The U.S. is a net oil exporter, and incomes in the domestic petroleum industry will rise. That should translate into more investment.

Still, Americans spend less on other stuff almost immediately, and new spending in the oil patch arrives with some lag.

Wells Fargo’s economists estimate that a 50% increase in oil prices would reduce consumer spending by 1 percentage point. By itself, that shouldn’t be enough to cause a downturn.

Wars always have unforeseen consequences.

By supporting the Houthis, Iran has been terrorizing shipping around the Suez Canal. By attacking other Gulf states, it has now effectively shut down passage through the Strait of Hormuz.

Qatar has halted liquefied natural gas exports. South Korea and Taiwan are heavily dependent on that gas for electricity generation.

Korea produces more than half of the DRAM and NAND that power electronic devices with short- and long-term memory. Taiwan makes about 70% of the advanced processing chips that go into smartphones, personal computers and data centers.

Other Asian economies, such as Japan and Pakistan, also depend on Gulf natural gas and, over time, could develop alternative supply channels such as U.S. gas. Building new capacity on the scale necessary to replace Gulf exports would take years, not months.

Many Europeans and American liberals are aghast that the U.S. and Israel would attack a sovereign state, but Iran long ago morphed into a terrorist enterprise threatening the West by enabling rogue groups to criminally disrupt global commerce.

If we let Iran continue unchecked, we would be giving it a foot on the neck of the global economy.

Oil price spikes in 1973, 1980, 1990 and 2008 all helped throw the U.S. economy into a recession. Not so in 2022, when the economy was emerging from COVID-19 shutdowns and was flush with federal stimulus payments to households and small businesses.

Greg Ip at The Wall Street Journal has observed that it takes more than an oil price spike to cause a recession. Some other factor, he says, must be present to assist its effects.

The Asian supply chain’s dependence on the guts of electronic devices may have metastasized into a ready-made assist to the disruptive consequences of a jump in oil prices. If Iran is permitted to continue supporting terrorists or if it maintains the capacity to shut down Persian Gulf exports, then it has a chance to tank the global economy.

A lot of other things have changed since the late 20th century.

Persian Gulf countries have been busily diversifying their economies. Now they are an important locus of data centers, a supplier of nearly one-fifth of the aluminum used in the U.S. economy, and a major source of nitrogen fertilizer for global agriculture and of helium used to make semiconductors.

These are all supply chain challenges, like those confronted when Russia attacked Ukraine, and those nations’ supplies of natural gas and fertilizer had to be replaced.

Importing nations did find ways around these dependencies, but not quickly.

Also, the U.S. economy is laboring under other supply chain stresses.

Mr. Trump’s on-again, off-again tariffs are forcing American businesses to make adjustments to the point that they have frozen new plant construction across most of manufacturing. The president’s immigration policies are creating, or at least exacerbating, labor shortages in factories and construction and elsewhere in the economy.

During the first Trump and the Biden administrations, the U.S. labor force added 4.5 million foreign workers. During the first 13 months since Mr. Trump returned to the White House, the country has lost 600,000.

Just consider those numbers against the fact that immigrants fill about one-fifth of STEM positions and more than two-fifths of doctoral-level science and engineering roles.

We must see the war through and into eventual negotiations, but a satisfactory conclusion could require us and the broader global economy to weather a recession.

Multiplying those costs, the loss of Middle Eastern oil has strengthened Russia’s economy and hand in Europe.

That’s not pretty, but we can’t let the contemporary “Axis” — Russia, China, Iran and North Korea — maintain such a chokehold on the U.S. and broader global economy.

• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.