---
title: "Tang Xiaofu: Is this time different? Can the world avoid a stagflation-type recession caused by the oil crisis?"
type: "News"
locale: "en"
url: "https://longbridge.com/en/news/283243131.md"
description: "Tang Xiaofu discussed the impact of high oil prices on the global economy in a column on Observer.com, pointing out that oil and natural gas are key energy sources for global industries. According to data from the International Energy Agency, fossil fuels account for as much as 80.2% of global energy consumption in 2024. High oil prices not only affect chemical production capacity but also pose a threat to food security, as natural gas is the main hydrogen source for nitrogen fertilizer production. Oil and gas raw materials account for 60%-80% of the production costs of basic chemicals, so fluctuations in oil prices will directly affect the prices of downstream products"
datetime: "2026-04-19T05:59:56.000Z"
locales:
  - [zh-CN](https://longbridge.com/zh-CN/news/283243131.md)
  - [en](https://longbridge.com/en/news/283243131.md)
  - [zh-HK](https://longbridge.com/zh-HK/news/283243131.md)
---

# Tang Xiaofu: Is this time different? Can the world avoid a stagflation-type recession caused by the oil crisis?

**Why High Oil Prices Lead to Stagflation**

Oil is the lifeblood of global industry, and natural gas is the skeleton and energy chamber of industry. This statement is not just a saying. First, in the energy sector, according to statistics from the International Energy Agency (IEA), 80.2% of global energy consumption in 2024 will be supported by fossil fuels, with coal accounting for 27%, oil for 29.8%, and natural gas for 23.4%. Additionally, 19.8% of energy consumption consists of 6.3% hydropower, 5% nuclear power, and truly new energy sources only account for 8.5%. Even in China, which has the largest new energy industry in the world, non-fossil energy will only account for 21.7% of total energy consumption by 2025, with wind and solar power combined at 9.5%, and biomass, geothermal, and ocean energy combined at 3.2%.

Secondly, high oil and natural gas prices, as well as product shortages, can greatly impact chemical production capacity globally. According to relevant data, about 12% to 14% of crude oil and 8% of natural gas are directly consumed in non-combustion raw material processes. More than 90% of bulk organic chemicals (such as "triene and triphenyl") are derived from oil and gas cracking. In particular, natural gas provides 70% to 90% of the hydrogen source needed for global nitrogen fertilizer production, which is a key foundation supporting food security for approximately 4 billion people worldwide.

Natural gas processing plant in the Bohai Oilfield

In the production costs of basic bulk chemicals (such as polyethylene and synthetic fibers), oil and gas raw materials account for as much as 60% to 80%. It has been proven that for every $10 per barrel change in crude oil prices, downstream products like plastics typically see a price linkage of $50 to $80 per ton. This extremely high cost proportion means that the competitive landscape of global chemical trade revolves tightly around energy endowments (such as the differential competition between North American ethane processes and Asian naphtha processes).

Moreover, the chemical industry is the largest industrial energy end-user globally, accounting for about 28% of industrial energy consumption. Because large-scale chemical reactions need to be conducted under extreme conditions (such as cracking furnaces requiring temperatures above 800°C), oil and gas are not only raw materials but also the best choice for providing high energy density heat sources. Before the large-scale commercialization of green hydrogen (hydrogen produced by water electrolysis), hydrogen production from natural gas (blue hydrogen) is currently the most economical and largest source of hydrogen, and the chemical industry itself is a major consumer of hydrogen (used for refining desulfurization, hydrogen cracking, etc.).

Thus, we see supply chain crises occurring in countries like Southeast Asia, Japan, and India: Companies like Thailand's Rayong Olefins (ROC) were forced to shut down at the end of March due to delays in the arrival of imported naphtha. This change directly removed about 6% of ethylene production capacity from the ASEAN region. Plastic processing enterprises in Vietnam and the Philippines have been forced to adopt measures such as rotating breaks, production limits, and alternating operations due to soaring costs and energy consumption allocations, leading to systematic shortages of packaging and daily-use plastic products Japan is facing a rare "energy supply disruption" risk since the end of World War II. To hedge against supply interruptions, the Japanese government has exceptionally decided to release a total of 80 million barrels from national and private oil reserves in phases, setting a historical record since the establishment of the oil reserve system in 1978. In India, hundreds of local factories have been forced to halt production for weeks due to a 50% surge in spot prices and obstacles in liquefied natural gas (LNG) imports, leading to a cost inversion. Since chemical raw material costs account for 60%-80% of total product costs, downstream polyethylene processing enterprises in India are facing widespread losses.

The related impacts have also spread to Europe, which has not yet recovered from the Russia-Ukraine war, and its natural gas inventory has now fallen to a dangerous level of less than 30%. The German Chemical Industry Association (VCI) pointed out that energy-intensive enterprises have been forced to charge an energy surcharge of about 200 euros per ton, and some production lines of giants like BASF are facing long-term shutdowns due to cost inversion. Additionally, the EU aviation industry has issued a warning that if supply disruptions continue, Europe will face a systemic aviation fuel shortage by the end of April.

As one of the sources of all these issues, the United States, while able to profit from exporting oil and gas due to its abundant shale oil and gas resources, has seen logistics chain disruptions and rising domestic energy prices caused by the rapid increase in global oil prices, which have raised costs across the board from packaging to construction materials, pushing up inflation and creating real conditions for rising U.S. Treasury yields, leading to pressure on the U.S. financial market.

It can be said that high oil and natural gas prices are a significant shock to the energy and industry of all countries, and the pressure on the global economy from this shock will be comparable to that of 1973. Extremely high oil and gas prices will not only directly suppress ordinary people's energy demands, such as driving, but will also put pressure on the pricing of manufacturing enterprises. After all, every link from plastic production to steel refining involves a large demand for oil and gas resources.

From this perspective, we can categorize the price shock into three layers.

The first layer is direct price transmission: After the rise in crude oil and natural gas prices, the prices of naphtha, basic chemical raw materials, and fuels often respond rapidly within days to weeks, while the complete transmission to the downstream price system typically takes about 4-6 weeks, causing a decisive impact on the costs and capacities of basic chemical products such as ethylene, propylene, and ammonia. Meanwhile, the rise in fuel prices leading to adjustments in freight rates or fuel surcharges will also increase the arrival costs of maritime, air, and land transportation.

The second layer is midstream manufacturing transmission: This layer mainly manifests as rising oil and gas prices leading to increased costs of intermediate materials such as plastics, synthetic rubber, chemical fibers, and synthetic resins, which in turn affects manufacturing industries such as automobiles, home appliances, and textiles and clothing. For high-energy-consuming industries like glass, ceramics, cement, and steel, rising energy prices will also significantly increase production costs. It is generally believed that the price increase cycle for these products will gradually manifest over weeks to months, forming a typical "cost-push" price increase. In agriculture, since natural gas is both an important raw material for nitrogen fertilizer production and a key energy source, it usually accounts for about 70%-80% of ammonia production costs, thus rising gas prices often further push up fertilizer and related agricultural material prices The third layer is the transmission to end consumption. At this level, we believe that the comprehensive transmission of oil and gas price shocks to the consumption end often requires 6 to 12 months, influenced by demand environment, inventory cycles, contract arrangements, and corporate bargaining power. It is generally believed that consumer goods with weaker substitutes and more rigid demand are more likely to pass on costs to the end. If end demand is weak, midstream processing companies often find it difficult to fully pass on the pressure of price increases, resulting not in synchronized price increases, but in compressed profit margins, or even "loss-making production."

Considering that oil prices maintained a low level below $80 per barrel for a long time before the war, and even approached $50 per barrel at one point, once oil prices remain high for a relatively long time, the suppressive effect on the global economy will be quite significant.

**Are high oil prices just a one-time shock? The market may be overly optimistic.**

On March 23, after Trump initiated his first TACO in the US-Israel-Iran conflict, the market followed his social media account's statements, fluctuating between TACO and no TACO. As the US and Iran signaled a ceasefire and the release of a second round of negotiations, US stock indices, especially the Nasdaq index, recovered all losses since February 28 during the trading day on April 13, and subsequently began to challenge historical highs.

Interestingly, this occurred after Trump announced the establishment of another blockade in the entire Strait of Hormuz. It seems that the market has accepted a hypothesis that the more the Strait of Hormuz is blocked, the faster it will be unblocked, whether this unblocking comes from Trump's TACO or Iran's concession.

However, this hypothesis completely ignores the fact that the number of vessels coming out of the Strait of Hormuz is only a fraction or even a tenth of what it used to be, while crude oil prices remain high. The market seems to increasingly price in the possibility of a long-term ceasefire between the US and Iran, leaning towards pricing the US-Israel-Iran conflict as a short-term one-time shock similar to the Russia-Ukraine war. However, I believe the market seems overly optimistic, even having a sense of "let's drink today while we can." Especially since all this happens around the time when the last batch of tankers arrives before the war and before the final delivery of WTI crude oil on April 21.

Recent events can all be connected from the perspective of TACO's decision-making. TACO is highly correlated with US Treasury yields, which have recently been highly correlated with the US-Israel-Iran conflict and oil prices. Thus, this pattern forms a paradox. I saw a statement online that summarizes this paradox well, and I would like to share it here:

> "The speed of the King’s TACO depends on the speed of the rise in oil prices. Currently, the market is very optimistic, oil prices are just over 100, so the King won’t TACO tonight. In fact, the stock market today also opened low and rose high, as everyone believes that blocking the Strait is just a trick of the King’s extreme pressure and won’t be taken seriously.
> 
> The funny part is here. The less the market believes in a long-term blockade of the Strait, the more oil prices stabilize, and the King is less likely to TACO, resulting in the blockade lasting longer; when the market starts to think the King is serious and oil prices soar, the King will immediately TACO, and oil prices will drop sharply again, playing a game with you." "As long as the foolish market continues to view the understanding king as a trading strategy, it will repeatedly play with you."

On March 23, multiple U.S. stock indices fluctuated back and forth in response to Trump's statements and Iran's reactions.

Although I remain pessimistic about a long-term ceasefire in the U.S.-Israel-Iran conflict, I believe that the nuclear issue is not the biggest point of contention in the U.S.-Iran ceasefire. The Strait of Hormuz, Iran's regional ally system, the security demand for U.S. troops to stay away from Iranian territory, and the lifting of all Western sanctions are the most challenging issues in U.S.-Iran negotiations. Here, I want to explore a question: Even if the U.S.-Israel-Iran war ends in the short term, will it fundamentally lead to oil prices returning to a low range in the short term?

My view is negative.

Even if all tankers immediately resume navigation, it cannot erase the shut-ins, facility damage, and supply chain disruptions that have occurred over the past month. Here we can provide some data: the global average daily consumption in 2025 is about 105 million barrels. According to pre-war forecasts, in the first quarter of 2026, global crude oil supply is estimated to exceed demand by about 3 to 4.25 million barrels per day. However, this balance has been disrupted. According to the OPEC monthly report, in March, OPEC's crude oil production fell sharply by 7.88 million barrels to 20.79 million barrels per day, with the reduction exceeding the single-month record during the 2020 pandemic. Iraq, Saudi Arabia, the United Arab Emirates, and Kuwait all recorded significant production cuts. Considering other reductions, global supply in March 2026 is expected to decrease by about 10.1 million barrels per day, which is likely to push crude oil supply below 100 million barrels per day, resulting in an estimated supply deficit of about 6 million barrels per day.

The figures provided by Fatih Birol, the Director of the International Energy Agency, are even more alarming. He stated that this conflict has nearly closed the Strait of Hormuz, with oil exports in the region decreasing by about 13 million barrels per day, resulting in a global daily supply loss of about 30 million barrels, meaning that the daily supply-demand deficit could even exceed 20 million barrels.

In order to stabilize oil prices, the International Energy Agency launched the largest coordinated action in history on March 11, releasing about 400 million barrels of crude oil reserves. This means that by mid-April, even if high oil prices lead to a decrease in oil demand, the crude oil in transit before the war and the stocks released by the IEA will become very tight. Assuming that the crude oil in transit before the war is at the same level as in January, theoretically, the IEA's released stocks can only support about two months of normal demand.

It is worth noting that this release of 400 million barrels is the largest collective release by the IEA since its establishment in 1974, far exceeding the 180 million barrels released during the Russia-Ukraine conflict in 2022. It is generally estimated that IEA member countries theoretically still hold about 1.2 billion barrels of public emergency reserves, and this reserve is not evenly distributed Currently, global crude oil supply continues to be under pressure. As of April 8, 2026, approximately 187 tankers carrying crude oil and refined products are stranded in the Persian Gulf and unable to pass through the Strait due to substantial suspension of navigation at the end of February.

Moreover, even if navigation were to fully resume now, many oil and gas production facilities have been damaged due to the war. The head of the IEA stated on April 13 that more than 80 oil and gas facilities have been damaged in the conflict. For example, in early April, official sources from Saudi Arabia reported that attacks had temporarily reduced its crude oil production capacity by about 600,000 barrels per day. According to Australia and New Zealand Banking Group (ANZ), the supply disruptions caused by this war could lead to long-term or even nearly permanent losses of up to about 2 million barrels per day, due to reasons such as facility damage, delayed maintenance, funding, and sanctions constraints. The Iranian Deputy Minister of Oil stated on April 12 that Iran plans to restore damaged refining and distribution facilities to 70%-80% of pre-war levels within 1 to 2 months, with partial restoration of the Ravan refinery taking about 10 days.

In other words, even if navigation were to resume immediately, the world still needs to consider the impact of repairing oil production facilities and the time required for global oil tankers to navigate. This means that futures prices for crude oil will be forced to converge towards the extremely tight spot market prices as delivery approaches. Furthermore, this spot market tightness may persist for more than a month after the formal lifting of the blockade (depending on the intensity of the fighting before the war ends).

From the current prices, the global oil futures market is severely distorted. Director Birol described the current oil crisis in the Persian Gulf as "the greatest energy security threat in history," stating that the losses in oil and gas supply have far exceeded those during the oil crises of 1973 and 1979, as well as the losses following the outbreak of the Russia-Ukraine war in 2022. However, unlike the Brent crude oil price reaching nearly $140 per barrel shortly after the outbreak of the Russia-Ukraine war, this round of oil crisis saw Brent crude oil peak at just under $120 per barrel, which was then quickly suppressed around $100 per barrel. This suppression has become the core driving force behind the rebound in global equity markets, leading to a deep V reversal in U.S. stocks.

In response, Director Birol stated in an interview that market prices have not fully reflected the severity of the actual chaos, and there remains a gap between the scale of the crisis and current prices. He believes, "I agree that there is a disconnect between the two, but I think we will soon see them align," warning that this will have serious consequences for the global economy.

* * *

**Against the backdrop of the Triffin Dilemma, the oil dollar paradigm may be changing**

While writing this article, the author came across an interesting article titled "On U.S.-Iran Negotiations and the Significance of the U.S.-Iran War to the United States," which mentioned a very interesting point: "Within the framework of the Triffin Paradox, the U.S.-Iran war has significant implications for the United States."

The article mentioned:

> "As the dollar hegemony system continues, the balance of U.S. national debt will continue to increase with the ongoing trade deficit, and the enormous U.S. debt needs increased backing
> 
> In the 1970s and 1980s, the dollar hegemony system underwent a patch— the petrodollar agreement, which forced Middle Eastern oil-producing countries to use their surplus to purchase U.S. Treasury bonds, allowing oil and gas to back the massive U.S. debt. However, this system has a carrying limit; over the past fifty years, the scale of U.S. national debt has expanded many times and is approaching $40 trillion. Therefore, the petrodollar agreement can no longer support such a huge U.S. debt. So, what should be done? Continue to upgrade and iterate the version.
> 
> Under the old model, when Middle Eastern princes sold oil, it increased the U.S. trade deficit; under the new model, when the U.S. sells oil domestically, it significantly reduces the U.S. trade deficit. Thus, an interesting scenario emerges: the more oil and gas the Middle East sells, the larger the U.S. trade deficit becomes, and the greater the debt pressure (ps: this is how the massive U.S. government debt is created); conversely, the more oil and gas the U.S. sells domestically, the larger the U.S. trade surplus becomes, and the smaller the debt pressure.
> 
> The article also mentions a viewpoint that the U.S.-Iran war is a continuation of the "Mar-a-Lago Agreement":
> 
> "In 2025, Americans provided a solution to the world, imposing tariffs on other countries and using the tariffs to back the continuously accumulating U.S. debt. However, this plan sparked opposition from all sides, leading to an intense tariff war around the world, and ultimately the plan fell through. Although this plan is somewhat naive, it points to the crux of the petrodollar hegemony system—America's persistent trade deficit.
> 
> Therefore, as a continuation of the Mar-a-Lago Agreement, Americans adopted a more radical and classical plan: as long as the U.S. accumulates a surplus against non-U.S. systems, over time, the massive U.S. national debt issue will be fundamentally resolved, without the need to seek additional backing. Thus, the U.S.-Iran war can be seen as a continuation of the Mar-a-Lago Agreement; this war will significantly reduce the surpluses of Middle Eastern countries—oil and gas cannot be exported—and will significantly increase the U.S. domestic surplus— to fill the gap in the Middle East, the U.S. must buy more oil and gas."
> 
> Although the author does not agree with the viewpoint in the article that the continued blockade of the Strait of Hormuz is more beneficial to the U.S., and believes that the blockade may further lead to rising oil and gas prices, thus having a decisive impact on dollar asset prices, the above reasoning to some extent illustrates one thing: that in the current financial environment, the U.S.-Iran war may have a decisive impact on the petrodollar paradigm.
> 
> The traditional petrodollar circulation relies on countries like Saudi Arabia exporting oil to obtain dollars, which are then invested in dollar assets, forming a circulation system of overseas dollars and domestic dollars. However, this system is now on the verge of collapse due to the rapid increase in U.S. debt limits and interest repayment costs. Moreover, the monetary overproduction since 2008 and the inflation since the COVID-19 pandemic have fundamentally destroyed the dollar's value since 1971.

 Oil Price Trends in the 1970s - Huaxi Securities Research Institute

Looking back to around 1973, the United States faced a situation similar to the present. A research report from the China International Capital Corporation (CICC) in November 2021 pointed out that inflation in the U.S. had risen from 2% in 1965 to 6% by 1970, primarily due to loose monetary policy combined with expansive fiscal policy. Entering the 1960s, more and more economists advocated for the government to adopt more aggressive fiscal and monetary policies to strengthen demand management. In 1962, the U.S. Council of Economic Advisers fully adopted the New Economics concept, aiming to achieve its policy goals of maximizing employment and growth. This ultimately led to the "Great Inflation" period from 1965 to 1982.

The year-on-year growth rate of M2 rose from 3% in 1960 to nearly 9% in 1963, maintaining a high level of around 8% for the next two to three years. During the Great Inflation period, the year-on-year growth rate of M2 led inflation by about two years. At the same time, the federal funds rate was significantly lower than the policy interest rate level needed to achieve potential growth.

On the fiscal side, the U.S. continued the "Great Fiscal" philosophy of the 1950s. Then-President Lyndon B. Johnson launched the Great Society Program in 1964, aimed at eliminating poverty and injustice, with a focus on increasing government investment in social security, education, and healthcare. His successors expanded the Great Society Program.

Entering the 1970s, under the continued dual expansion of monetary and fiscal policy, the U.S. economy suffered multiple supply shocks: the collapse of the Bretton Woods system, a significant depreciation of the U.S. effective exchange rate, and a marked deterioration in trade conditions; in 1972, consecutive years of abnormal climate led to a global food crisis; the oil crises of 1973 and 1979 had a more direct impact on the U.S. In the early 1970s, President Nixon implemented price controls to curb inflation, exacerbating supply-demand imbalances, which led to a release and explosion of previously accumulated supply-demand pressures after the relaxation of price controls in 1973, under the impact of supply shocks (the food crisis and the first oil crisis). All of this became the core reason for the persistent inflation of the 1970s.

Looking back at oil prices after 1973, we find that although the U.S. entered a recession in 1974, oil prices remained above $10 per barrel for a long time, primarily due to one organization: OPEC, established on September 14, 1960, at a meeting in Baghdad.

As early as 1970-1973, OPEC continuously expanded its influence over oil prices and revenue distribution through a series of negotiations in Tehran, Tripoli, and elsewhere, causing the traditional pricing system dominated by multinational oil companies to begin to loosen, with crude oil prices gradually rising. After the outbreak of the Fourth Middle East War in 1973, Arab OPEC member countries imposed an oil embargo on the U.S. and other countries supporting Israel while simultaneously cutting production, leading to a sharp rise in international oil prices. Subsequently, in February 1974, the U.S. convened a Washington Energy Conference with major industrial consumer countries and promoted the formal establishment of the International Energy Agency (IEA) within the OECD framework in November of the same year At the same time, the United States and Saudi Arabia established closer economic and financial cooperation arrangements in 1974, laying an important foundation for the later so-called "petrodollar system." Overall, the crisis of 1973-1974 marked a significant rise in OPEC's international status, with oil-producing countries gaining a noticeable influence over international crude oil prices. It was precisely due to the inclusion of OPEC that oil prices remained at a high level for a considerable period and guided a shift in the pricing paradigm of oil.

Now it seems we have reached another crossroads. Drawing parallels to the monetary and fiscal policies of the 1970s, we see that from 2008 to the COVID-19 pandemic, there have been multiple instances of quantitative easing. We also witnessed the U.S. providing financial support to its citizens and related interest groups during the pandemic to help them through difficulties, as well as the rapid development of shale oil and gas during Trump's two terms, making the U.S. the world's largest exporter of refined oil, the third-largest exporter of crude oil, the second-largest importer of crude oil, and the largest consumer of crude oil. Similarly, Russia, which is not part of OPEC, is the world's second-largest exporter of crude oil and the third-largest exporter of refined oil.

This means that if the U.S.-Israel-Iran conflict ultimately leads the U.S. to choose to promote a shift in the petrodollar paradigm, both the U.S. and Russia, as well as the OPEC countries affected by the war, would be willing to maintain higher crude oil prices. Furthermore, considering that Gulf countries represented by Saudi Arabia have been suffering from low oil prices in recent years and are in a state of fiscal deficit, these countries have no intention of voluntarily lowering oil prices.

Theoretically, in the context of global oversupply, OPEC countries may also be willing to cooperate with a broader range of oil-producing countries through mechanisms like OPEC+ to further restrict production and raise oil prices in order to maintain fiscal balance after the war.

It is also worth noting that while OPEC's overall crude oil exports account for about 50% of global exports, the combined share of the U.S. and Russia is only about 20%. However, in the refined oil export sector, OPEC's overall share is only 18%-20% of global exports, while the U.S. alone accounts for 20%, and Russia about 9%. If the U.S. truly attempts to change the petrodollar paradigm, considering that both the U.S. and Russia are willing to raise refined oil prices to achieve higher profits to solve their own problems, and their combined share of refined oil exports is approaching 30%, we may see a long-term maintenance of high oil prices and feel the ongoing pressure of high oil prices on the economy.

As the U.S.-Israel-Iran conflict progresses, the petrodollar is also being objectively forced to seek a paradigm shift. The core of the petrodollar is the U.S. providing security protection for Middle Eastern oil-producing countries, with oil from these countries being settled in U.S. dollars and flowing back. However, Iran has already proven that the U.S. is even unable to guarantee its own security during wartime, let alone that of Gulf countries. At the onset of the war, U.S. Treasury bonds faced massive sell-offs. According to reports from the Financial Times and other media, since the outbreak of the Middle Eastern conflict (U.S. and Israel taking military action against Iran) on February 25, 2026, the scale of U.S. Treasury bonds held by foreign official institutions at the New York Federal Reserve plummeted by $82 billion in just over a month Currently, the total scale of custody has dropped to about $2.7 trillion, the lowest level since 2012. This undoubtedly disrupts the theoretical foundation of petrodollars.

The U.S. debt problem and the shackles of not being able to raise interest rates mean that the dollar can only solve the negative impact of debt on its economy through depreciation in the long run. After the crisis, the traditional petrodollar paradigm may face more profound challenges.

* * *

**Inflation + Recession, Can We Avoid It?**

In the previous discussion, we talked about the possibility that the oil pricing center may maintain a high-level balance. What impact will this have on the economies of Europe and the United States? Many people try to emphasize that high oil prices are a significant benefit for the United States, a leading oil and gas exporter, but they overlook two issues: 1. Is the current financial foundation of the United States based on oil exports, or on technology and consumption? 2. The impact of high oil and gas prices on the United States and its allied system.

Let's talk numbers.

According to the latest data from the U.S. Bureau of Economic Analysis (BEA), personal consumption expenditures (PCE) are expected to account for 68% of the nominal GDP of the United States by 2025. In the same year, the value added of the digital economy has exceeded $3.4 trillion, increasing its share of overall GDP to about 12.5%. Notably, the compound annual growth rate (CAGR) of the digital economy that year is approximately 7.1%, more than three times the growth rate of the overall U.S. GDP (about 2.2%) during the same period. Generative AI and cloud infrastructure have become the main drivers of growth.

According to data from the U.S. Bureau of Economic Analysis (BEA) and the Energy Information Administration (EIA), the total direct export value of oil and gas (crude oil, refined oil, and liquefied natural gas) is expected to be between $250 billion and $300 billion, accounting for about 0.9% to 1.0% of the U.S. GDP in 2025. Even considering the dual increase in the unit price and quantity of U.S. oil and gas exports, it is difficult for U.S. oil and gas exports to account for 2% of the GDP in 2026.

So how significant is the impact of high oil and gas prices on the United States and its allies?

The first observation point is that after the surge in oil and gas prices exceeding $100 in March, it once triggered a tightening of the overseas dollar circulation system and a sell-off of dollar assets, while U.S. stocks accelerated their decline, with the Nasdaq index dropping about 20% from its historical high until March 23, when Trump completed the first TACO in the current U.S.-Israel-Iran conflict.

The S&P 500 and Nasdaq indices rebounded rapidly and reached new historical highs after hitting a phase low on March 23.

Secondly, high oil prices will not only lead to a rapid increase in costs for the United States, a "country on wheels," during daily commuting. For every $10 per barrel increase in crude oil prices, under the assumption of full transmission, the national average gasoline price is expected to rise by about 24 cents per gallon. According to EIA data, based on the average annual gasoline consumption in the United States, this will result in an additional annual gasoline bill of about $30 billion for American households, significantly suppressing other consumption At the same time, oil prices will raise a series of costs such as freight, aviation, distribution, plastics, and petrochemicals along the contagion chain mentioned earlier, ultimately reflecting on the prices of goods and services. Thus, consumers are not just facing "slightly higher oil prices," but rather a basket of living costs that are stickier and higher, which drains the cash flow of ordinary people and leads to a further compression of total physical consumption.

Moreover, high oil prices often reinforce the expectation that "inflation is not over," which makes residents more conservative about future bills, leading to delays in large or deferrable expenditures such as automobiles, home appliances, electronic products, renovations, and travel, ultimately extending to all areas of consumption, thus appearing on a broader level.

For the United States, consumption is the fundamental driving force of the American economy, and it plays a decisive role in financial stability (demand for U.S. Treasury bonds, value of the U.S. dollar). A collapse in consumption will directly lead to the breakdown of the U.S. economy and finance.

The second observation point is the stock prices of U.S. technology companies. High energy prices and the resulting high inflation will exert long-term pressure on technology stocks that are crucial to the U.S. on multiple levels.

> First, high oil prices will lead to tight free cash flow, and residents may reduce investments in U.S. stocks and consumption of technology-related products.
> 
> Second, when effective demand is suppressed, it will lead to a series of suppressed demands such as corporate expansion and advertising.
> 
> Third, high oil prices will lead to a decline in valuations for technology companies that are centered around hardware, semiconductor equipment, electronic manufacturing, and logistics due to rising supply chain costs.
> 
> Fourth, high inflation will lead to a decrease in real interest rates, increasing the attractiveness of HALO (Heavy Assets, Low Obsolescence) assets, and lowering the valuation expectations for high-tech industry companies.

The third observation point is the interest rates and fiscal space of the United States and its allied countries. Western industrial countries centered around Europe, the United States, and Japan have, under the guise of modern monetary theory, engaged in debt expansion to drive economic development over the past few decades, achieving economic prosperity. In this structure, the harm of high oil prices is not just inflation itself, but it will also raise interest rate constraints, compress fiscal space, and worsen the growth-inflation combination.

According to U.S. Treasury interest tracking data, net interest expenditure in the U.S. for fiscal year 2026 is expected to reach $1.0 trillion, accounting for 3.3% of GDP and 21%-23% of fiscal revenue. Its total debt accounts for 101% of GDP; similarly, Japan and the European Union have total debts of over 230% and 80% of GDP, respectively, with interest expenditures accounting for about 41% and 10% of tax revenue.

Even in the face of upward inflationary pressures, the Federal Reserve has not given up on hinting at the possibility of interest rate cuts.

According to traditional economic theory, high inflation requires a combination of monetary and fiscal policies. In terms of monetary policy, central banks often raise financing costs and suppress demand through interest rate hikes, balance sheet reductions, or maintaining tight liquidity; in terms of fiscal policy, governments need to reduce deficit expansion and avoid continuing to stimulate total demand through large-scale spending or tax cuts However, this operation poses significant difficulties for high-debt countries like the US, Europe, and Japan, which rely on debt to drive GDP growth, especially the United States and Japan. It is almost impossible for them to choose a combination of tightening fiscal policy and raising interest rates while reducing the balance sheet, as this would almost inevitably lead to a recession. A clear expectation of recession is unacceptable for the US government.

However, if left unchecked, it could also lead to stagflation-type recession due to high oil prices, reminiscent of the history in 1974. If a model similar to Erdogan's approach of lowering interest rates, expanding the balance sheet, and massively stimulating the economy is chosen, it may keep the financial system operational and prevent collapse, but it could lead to soaring asset prices and severe devaluation of the currency, potentially wiping out years of wealth accumulation for the middle class.

Thus, we see that the next chairman of the Federal Reserve is Walsh, known for lowering interest rates and reducing the balance sheet. However, as I mentioned in a previous article, whether his ideas on lowering interest rates and reducing the balance sheet can truly be implemented remains a significant question mark. Overall, against the backdrop of high oil prices, I believe there is a considerable possibility of Western countries experiencing a recession again, especially a stagflation-type recession. In this context, China may have unexpectedly favorable development opportunities.

**This article is an exclusive piece from Observer Network, and the content reflects the author's personal views, not the platform's views. Unauthorized reproduction is prohibited and will be subject to legal liability. Follow Observer Network on WeChat guanchacn for daily interesting articles.**

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