The Trump administration is trying to lower energy prices, but the recent rise in oil stems from refinery problems that could further strain Americans' budgets -- and pose risks to economic growth.
President Donald Trump signed an executive order late Friday exempting Russia from most sanctions measures that Congress passed last month. (Friday's order still keeps in place existing sanctions on Russia that were implemented under earlier executive orders.)
The news comes after Trump announced last week that he had secured a deal with Russian President Vladimir Putin to immediately supply more diesel to U.S. and global markets.
The administration has increasingly battled growing consumer pessimism over higher inflation in the wake of the Iran war. The conflict in the Middle East, particularly around the Strait of Hormuz, has pushed oil prices up nearly 58% so far this year, writes Brett Mitstifer, chief investment officer of private banking and wealth management at Flagstar Bank. That has not only boosted inflation, but it has also pressured consumers, complicated the Federal Reserve's rate policy path, and helped drive 10-year Treasury yields higher.
The consumer price index, for example, rose 3.7% year over year in September, up from August's 3.4% pace. That's not only high, but it's moving in the wrong direction from the Fed's 2% inflation target -- a level policymakers haven't hit in over five years. Officials raised interest rates by a quarter of a percentage point in September, but are expected to keep rates steady at the Federal Open Market Committee meeting at the end of the month before resuming hikes in December in hopes of returning inflation to the central bank's target.
The higher costs of living, particularly higher prices at the pump, have sent consumer sentiment spiraling. The University of Michigan's consumer sentiment index, which measures households' economic outlook, hit its second-lowest level ever in early October. It was the third consecutive month that consumer sentiment has fallen -- and moved closer to the record low final reading reached earlier in May.
But despite the promise of more supply becoming available and flows of crude oil through the Strait returning to near pre-war levels, oil prices remain high. Brent crude oil futures hit a high of $110 a barrel this week, while West Texas Intermediate crude oil reached $101 per barrel on Friday.
In fact, most experts do not believe the diesel deal with Russia will lower prices much in the near term. Oil futures curves and market forecasts signal that gas could remain at around $100 a barrel through late fall, before easing toward the $90 to $95 range by the end of the year.
"The diesel deal shows that Washington's Russia policy is now driven by high prices at the pump before the November 3 midterm elections, rather than by any shared transatlantic strategy," writes Matthias Matthijs, a senior fellow for the Council for Foreign Relations focusing on Europe.
The higher costs reflect the continued uncertainty in the Middle East, but much of the recent surge is due to refinery constraints. Persian Gulf crude oil flows have returned to approximately 80% of pre-war levels as of the end of September, according to commodity analytics firm Kpler. Yet flows of Middle Eastern refined products remain at only 58% of pre-war levels, sitting at approximately 3 million barrels per day at the end of September, according to J.P. Morgan.
East Coast distillate fuel inventories -- often referred to as heating oil or diesel "stocks" in energy markets -- fell 32% below their five-year seasonal average as of September.
That's pushed up shipping costs, with freight rates hovering around $80 million for November voyages between the U.S. Gulf coast to Asia-Pacific destinations, Argus, an energy market intelligence provider, reported in early October. That's up from about $30 million to $50 million for similar voyages in September -- and a marked increase from the $10 million cost levied before the Iran war began in February.
The longer the refinery constraints and higher oil prices last, there's an increased risk that these factors become more entrenched in the broader U.S. economy. As it is, airfares were already 17% higher in September than they were in January, according to the consumer price index. Further, economists expect the energy shock to spur stronger inflation in food costs in the coming months.
Consumers are feeling the pinch. The average household will spend almost $700 more on gasoline this year compared to the prior year, Morgan Stanley economists calculated last month.
"The energy shock is now eliciting changes in behavior and is contributing to the demand destruction hitting lower-income households," write RSM US's David Carter and Joe Brusuelas, who point out that the number of miles driven by Americans already has fallen this year. That signals higher prices are shifting consumer habits.
The oil shock has already caused several downgrades in economic growth expectations. Goldman Sachs economists have estimated that increased oil and refined product prices, as well as higher interest rates, will act as a 0.4 percentage point drag on GDP growth in 2026.
The stress on households drove Morgan Stanley to trim its forecast for inflation-adjusted consumer spending growth for next year to 1.8% from 2.1%. Goods spending is expected to bear the brunt of the slowdown, due to more exposure to energy prices and interest rates, writes chief economist Michael Gapen.
Morgan Stanley has lowered its inflation-adjusted gross domestic product growth projections from 2.6% to 2.3% for 2027. Overall, economists surveyed by FactSet expect GDP growth will be 2.2% for 2026 and dip to 2.1% in 2027.
But the outlook for the U.S. economy -- although healthy -- does still carry risk.
"Nothing we hear from the U.S. administration suggests there is any plan on how to draw an end to the conflict in the Middle East," writes Mark Dowding, BlueBay chief investment officer at RBC Global Asset Management. He expects oil prices will remain at current levels, adding that there is a not insubstantial risk that a regional escalation pushes energy prices much higher.
Comments