Are High Oil Prices "Backfiring" on the U.S. Economy? Warnings Mount: "K-Shaped Divergence" Will Intensify!

Caixin March 18th Report (Editor Huang Junzhi) As the US and Iran are at war and oil and gasoline prices soar, economists are warning that the previously existing “K-shaped economy” dilemma in the United States may worsen.

The so-called K-shaped economy refers to the widening gap between the wealthy and the poor in the economy — which has been a typical trend in the US since last year.

Economists believe that rising oil and gasoline prices effectively tax household purchasing power, often hitting low-income earners harder than the wealthy. Nicholas Bloom, an economics professor at Stanford University, expressed concern that this dynamic could intensify the K-shaped fluctuations in the economy.

The US-Iran war has blocked traffic through the Strait of Hormuz, a vital maritime route for global oil supplies, causing the largest oil supply disruption in history. As a result, oil prices and gasoline prices derived from crude oil have surged significantly.

Since the conflict erupted on February 28, the global benchmark Brent crude oil price has increased by over 40%, reaching approximately $103 per barrel at the time of writing. According to the American Automobile Association (AAA), the average gasoline price in the US reached $3.79 per gallon on Tuesday, up about 87 cents from a month ago, a 30% increase.

The US Energy Information Administration (EIA) states that the average gasoline price has reached its highest level since October 2023.

Moody’s chief economist Mark Zandi said, “This is especially difficult for middle- and low-income families because they have little or no financial resources. If they need to spend more of their income on gasoline, they will have to cut back on other expenses or slow down paying off credit card debt and other liabilities.”

“Rising gasoline prices act like a regressive tax because low-income households need to allocate a larger proportion of their budgets to energy,” he added.

Michael Klein, an economics professor at Tufts University, said that rising oil prices — similar to tariffs — amount to a “tax on consumers’ purchasing power.” In this scenario, households are effectively paying taxes to oil companies rather than the federal government.

He further explained that if households spend more income on gasoline, their spending on other goods and services will decrease. Klein pointed out that this shift in consumption patterns could negatively impact the US economy, as consumer spending accounts for a large portion of the country’s gross domestic product.

Impact on Other Industries

Experts also warn that oil price fluctuations can trigger chain reactions, driving up prices in other sectors of the economy.

For example, on Tuesday, US diesel prices surpassed $5 per gallon for the first time since the outbreak of the Russia-Ukraine conflict in 2022. Economists say this will increase trucking costs, potentially raising prices for food and other goods and services.

According to data from the International Air Transport Association (IATA) on March 13, the global price of aviation fuel (a major cost for airlines) has increased by about 83% over the past month.

“Rising fuel costs, along with downstream effects on shipping, tourism, and trade, could further push up consumer prices,” said Stephen Kates, a certified financial planner and financial analyst at Bankrate. “Typically, companies pass some of these costs on to consumers.”