Recession risk rises to 37% as Iran war pushes oil past $100

A prolonged conflict in the Middle East threatens to derail the U.S. economy, as soaring energy prices fuel inflation and heighten fears of a new recession.

The escalating war between Iran and a U.S.-Israeli coalition has pushed crude oil prices over the $100 per barrel mark for the first time since 2022, sending a shockwave through a global economy already struggling with persistent inflation. The surge, which has seen U.S. crude prices jump nearly 50 percent since the conflict began on February 28, is now forcing policymakers and investors to confront the growing likelihood of a significant economic downturn.

"An extended bout of elevated energy prices could put upward price pressure on a variety of other products," Federal Reserve Vice Chair Philip Jefferson said in a March 26 speech. "A sustained energy price shock, however, could have material implications."

The market reaction has been swift. West Texas Intermediate crude settled near $103 per barrel at the end of March, while the international benchmark Brent approached $113. This has translated directly to pain at the pump for American consumers, with the national average price for gasoline crossing the psychological threshold of $4 per gallon, an increase of over a dollar since before the conflict. Diesel prices have surged more than 40 percent to over $5.40 per gallon, threatening to drive up costs across the supply chain. In response to the turmoil, the S&P 500 has fallen 7.3 percent since hostilities began, while energy stocks have climbed 12.6 percent.

The core of the crisis lies in the disruption of maritime traffic through the Strait of Hormuz, a vital artery for global energy that typically handles about a fifth of the world's oil supply. Iran's effective closure of the strait has choked off exports from Gulf Arab producers, leading to what the International Energy Agency has called the biggest supply disruption in history. "You just can't take 8 to 10 million barrels a day of oil and 20 or so percent of the [liquefied natural gas] market off the world stage without having some significant repercussions," ConocoPhillips CEO Ryan Lance said at the CERAWeek energy conference in Houston.

Inflationary Fears and Fed's Dilemma

The spike in energy costs is reigniting inflation concerns at a critical moment for the Federal Reserve. After five years of elevated inflation, another price shock could entrench higher price expectations, making it harder for the central bank to achieve its two percent target. "I am particularly concerned that yet another price shock could increase longer-term inflation expectations," Fed Governor Michael Barr said on March 26.

This complicates the Fed's policy path. Before the conflict, markets anticipated gradual interest rate cuts in 2026. Now, fixed income markets suggest the federal funds rate could remain at its current level of 3.5 to 3.75 percent for the rest of the year, according to the CME FedWatch Tool. The probability of a U.S. recession in 2026 has risen from 22 percent before the conflict to 37 percent, according to prediction market Polymarket.

While the Trump administration has authorized the release of 172 million barrels from the Strategic Petroleum Reserve and waived shipping restrictions to ease costs, analysts are skeptical these measures can provide significant relief without a resolution in the Strait of Hormuz.

Global Ripple Effects

The energy crisis is not confined to the United States. Fuel shortages are rippling through Asia and are expected to hit Europe by April, according to Shell CEO Wael Sawan. Asian nations, which were heavily reliant on Middle Eastern oil, are now competing for limited Russian crude supplies after the U.S. temporarily eased sanctions on shipments at sea.

The conflict's duration remains the key variable. Oil industry executives have warned that the market is not fully pricing in the physical disruption to supply chains. "All will depend [on] how long this conflict will last," TotalEnergies CEO Patrick Pouyanné told CNBC. "Otherwise we will have very, very dramatic consequences."

This article is for informational purposes only and does not constitute investment advice.