Episode summary
Oil Shock Hits the U.S. Consumer
Thoughts on the Market (Morgan Stanley)
· · 9 min · Hosts: Ariana Salvatore · Guests: Arunima Sinha
Summary
The discussion focused on how a prolonged oil disruption could affect U.S. consumers, inflation expectations, and politics if gasoline prices keep rising. The host argued that the key market question is how long the conflict lasts, with little conviction on a quick resolution and several indicators to watch, including traffic through the Strait of Hormuz, escalation risks, and whether policy offsets can meaningfully blunt the supply loss.
The guest said the shock is different from tariffs because it hits consumers directly at the pump rather than filtering through business costs. She estimated gasoline still represents only about 2% to 3% of total spending, which gives households some cushion, but argued that if oil prices stayed 50% higher for two to three quarters, real personal spending growth could be hit by about 40 basis points after 12 months, mostly through durable goods. She also said the University of Michigan survey showed year-ahead inflation expectations stopped declining, with the biggest uptick among lower-income consumers.
Politically, the host argued the episode could matter for the midterms because affordability is already a central issue and voters tend to react when higher gas prices feed into inflation, cost of living, and job expectations. She said past elections suggest roughly $3 gasoline is friendlier to the incumbent party, while $4 and especially $5 a gallon become increasingly difficult for the administration and Republicans in Congress.
Key takeaways
- The host said the biggest market variable is conflict duration, with limited visibility on a quick resolution and close attention on the Strait of Hormuz and escalation risk.
- The guest said policy offsets like easing Russia sanctions or a Jones Act waiver would not fully replace the estimated 20 million barrels per day supply loss.
- The guest estimated gasoline accounts for only 2% to 3% of total spending, but a sustained shock could still reduce real personal spending growth by about 40 basis points after 12 months.
- The guest said the shock is more direct than tariffs because consumers feel it immediately at the pump, not just through business pass-through.
- The guest said inflation expectations paused their decline after the conflict started, and lower-income households saw the sharpest increase in both inflation and unemployment expectations.
- The host said gas prices around $3 a gallon tend to favor the incumbent party, while $4 and $5 become progressively more politically damaging.
Notable quotes
“I would say there's very little conviction just because of the uncertainty associated with this conflict”
“We think that these policy offsets are not going to really be enough to mitigate that supply loss that we're getting”
“this is going to hit consumers at the front end and directly”
“if oil prices were to be about 50% higher and they last for two to three quarters, it could hit real personal spending growth by about 40 bips after 12 months”
“once you see that feed through to, you know, inflation, cost of living, job expectations, that's when it starts to really matter for people”
How the episode opens
Welcome to Thoughts on the Market. I'm Aruna Masha from Morgan Stanley's US and global economics teams and I'm Ariana Salvatore, head of US policy strategy. Today, what are the implications of the ongoing oil disruption for the US consumer?
It's Wednesday, March 18th at 10 a.m. in New York. Ariana, let's start with where we are in week three of this particular oil disruption and what you're thinking about in terms of what the paths to resolution could look like.
Yeah, great place to start. So, I would say before we get into what the resolution could look like, we need to think about how long could this conflict possibly last? And that's the most relevant question for investors as well.
And there I would say there's very little conviction just because of the uncertainty associated with this conflict. But I'm keeping my eye on three different things. The first is a clearer prioritization of the objectives tied to the conflict.
The Trump administration has laid out a number of different goals for this conflict, some of which are shorter in nature than others. The second thing I think we're looking at that's really important is traffic at the street of Hormuz. And there the Trump administration has spoken about insurance, you know, naval escorts, all of these things that we think will take some time to really come to fruition.
And at the time that we're recording this, it seems that we're still getting about low singledigit number of tankers through the straight on a daily basis. So that's the second thing. The third point I would make is any type of escalation is really critical here.
So whether it's vertical, meaning different types of weapons used, different types of targets being hit or horizontal escalation, broadening out into different proxies and and more so throughout the region.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- oil disruption
- gas prices
- consumer spending
- inflation expectations
- u.s. midterm elections
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