The energy crisis isn’t recessionary yet, but there’s a scenario where oil prices could bring the US economy to a ‘standstill,’ Oxford Economics says

The war in Iran has sparked a global energy crisis that has rocked markets and sent oil prices surging to their highest level in four years. The chances of a quick resolution appear to be deteriorating as the conflict escalates, as do hopes that the U.S. economy might escape unscathed.

The war has effectively blocked off the Strait of Hormuz, a vital energy corridor that links oil and gas producers in the Persian Gulf with the rest of the world. The closure has cut off the roughly 20 million barrels of oil that normally flow through the strait each day, according to the International Energy Agency. The IEA estimates the conflict is removing roughly eight million barrels daily from the global supply, making the crisis the biggest oil supply disruption in history. Oil prices have been on a rollercoaster as a result. Brent crude, an international benchmark that cost around $70 a barrel before the war, grazed $120 last week and has since settled between $90 and $100. 

The swings have already caused gasoline prices for U.S. drivers to rise, but it might not be enough to force the severe downturn some economists have warned of. Price levels so far might only have a marginal impact on economic output over the long run, according to a report published Friday by Oxford Economics, an advisory firm. 

But that scenario rides on a relatively quick return to pre-war price levels over the next few months. The longer the strait remains closed and the higher prices rise, the faster the economic situation around the world—including in the U.S.—deteriorates.

Breaking parts of the economy

Oxford Economics uses a standard rule of thumb to estimate the economic impact of pricier oil: Every time oil gets $10 more expensive for a sustained period—determined to be around two months—it amounts to a 0.1% decline in GDP due to higher inflation and slower growth. If prices average $100 for two months, it would erase a few tenths of a percentage point of global GDP growth, but a recession would likely be avoided, according to the report.

The breaking point for the economy, Oxford Economics found, will be if oil prices average around $140 a barrel for two months. At that price, spillover effects would be much harder to contain, and many parts of the world would be flirting with economic decline.

“There are mild contractions in the Eurozone, the UK, and Japan, while the U.S. nears a temporary standstill and layoffs push up the unemployment rate, leaving it close to a recession,” the report’s authors wrote.

The problem with calculating the economic consequences of higher oil prices is that the implications are exponential. The more prices rise, the more knock-on effects could happen to hurt the economy. Higher-for-longer oil and transportation costs would begin to spill over into food and other goods, making inflation an across-the-board problem rather than a primarily fuel and energy-focused one. The Federal Reserve and other central banks would also be more inclined to tighten their interest rate policy if it became clear oil prices would remain high, dampening down economic activity. 

The final complication is more psychological. Sustained high oil prices could lead to a “deterioration in the collective psyche,” according to the report, as expectations of high prices become fixed among consumers. And in the car-dependent U.S., where consumers pay particularly close attention to gasoline prices, fuel inflation would risk crowding out households’ disposable income and lower spending elsewhere, also contributing to a slowdown.

Uncertain outcomes

Under this worst-case scenario, U.S. inflation would likely peak at around 5% in the second quarter of 2026, up from 2.4% currently, according to Oxford Economics’ modeling. This would be the highest inflation since March 2023. Such readings would likely push the Federal Reserve to adopt a more hawkish stance and potentially favor hiking rates this year. The Fed is likely to hold steady on rates this week, but the Iran conflict has also made many forecasters inclined to expect no cuts at all this year.

While the $140 scenario is a serious warning, Oxford Economics notes that the odds of this outcome remain low for now. A more plausible scenario, according to the authors, would be for oil prices to average around $100 per barrel, in line with where prices have fallen for most of the past few weeks. Much depends on when the conflict might wind down and the strait becomes safe to navigate again, allowing oil and natural gas exports to leave the Gulf once again. Trump administration officials recently said several weeks could still pass before hostilities subside.

Oil prices moderated on Monday on the back of several U.S. announcements signaling supply boosts, including the temporary loosening of sanctions targeting Russian oil exports, Iranian tankers receiving permission to leave the Gulf, and President Donald Trump’s pleas to other countries to help secure the strait. The IEA-coordinated release of 400 million barrels of global emergency oil reserves has also helped reassure markets with a limited buffer.

But oil prices have become accustomed to price swings during this war. Early in the conflict’s second week, after Trump wrote on Truth Social that higher oil prices were a “small price to pay” for achieving U.S. goals in Iran, oil prices jumped 25% overnight to just below $120 a barrel, before retreating later in the week.

This story was originally featured on Fortune.com