The oil shock triggered by the crisis in the Persian Gulf has pushed crude above $100 per barrel, reviving familiar fears of economic turmoil in the United States driven by surging gasoline and diesel prices. Political leaders have long lamented high oil prices, yet President Donald Trump celebrated the price spike last week, arguing that the “United States is the largest oil producer in the world, by far, so when oil prices go up, we make a lot of money.”
His embrace of higher oil prices marks a sharp departure from his past pledges to lower costs at the pump. Trump has long decried high oil prices, and Energy Secretary Chris Wright has argued that elevated prices may benefit a few oil companies but not the “99 percent of Americans” who consume these energy products.
The oil shock triggered by the crisis in the Persian Gulf has pushed crude above $100 per barrel, reviving familiar fears of economic turmoil in the United States driven by surging gasoline and diesel prices. Political leaders have long lamented high oil prices, yet President Donald Trump celebrated the price spike last week, arguing that the “United States is the largest oil producer in the world, by far, so when oil prices go up, we make a lot of money.”
His embrace of higher oil prices marks a sharp departure from his past pledges to lower costs at the pump. Trump has long decried high oil prices, and Energy Secretary Chris Wright has argued that elevated prices may benefit a few oil companies but not the “99 percent of Americans” who consume these energy products.
This apparent dissonance reflects the dramatic shift in the U.S. energy landscape over the past decade—from a large net importer of oil to a significant exporter. High oil prices have long imposed pain at the pump, but today, they also bring significant benefits to U.S. oil producers. This means that rather than draining income abroad, higher oil prices increasingly redistribute income within the United States.
The result is a shock that still hurts consumers but has the potential to be less destructive or, at least in theory, even net positive for the economy as a whole. With the right policy changes, the previous vulnerability to high oil prices can now be a source of strength. In particular, allowing the tax rate paid by U.S. producers to vary with changes in in oil price could help cushion the blow to consumers and, in doing so, increase the economy’s resilience to oil shocks.
The scale of the current shock is extraordinary. The supply outage is the largest ever recorded, far exceeding prior disruptions not only in absolute terms but even as a share of global demand. Global oil prices are up over 40 percent since the United States and Israel first struck Iran. Gasoline prices have already climbed more than 70 cents since the crisis began and will rise further as higher crude prices work their way through the system. Diesel prices—critical for trucking and the cost of goods—are also climbing to more than $5 per gallon.
Numerous analysts warn that a sustained period of high oil prices could inflict serious damage on economic growth. Oil shocks raise the cost of transportation, heating, and petroleum-based goods. And by increasing uncertainty, high prices may prompt businesses and households to delay spending and investment. Nearly every major oil shock of the 20th century preceded a recession, as economist James Hamilton famously documented. Two decades ago, economist Lutz Kilian estimated that a 10 percent supply disruption—smaller than today’s—could shave as much as 2 percentage points off the U.S. GDP.
Yet the United States is no longer the same oil economy it once was. Twenty years ago, the country imported roughly 60 percent of the oil that it consumed. Today, it is a large net exporter, sending more than 3 million barrels per day of crude oil and petroleum products abroad. At the same time, the U.S. economy uses far less oil per unit of economic output: the U.S. economy is nearly four times larger than in 1973, while oil demand is roughly unchanged.
Public debate, however, still reflects a mindset shaped by scarcity and import dependence—the era of boxy, wood-paneled sedans and miles-long lines at gas stations. Other petrostates welcome higher oil prices for the fiscal windfalls that they bring. In the United States, by contrast, price spikes still trigger anxiety. That is what made Trump’s acknowledgement of the shift—and his apparent embrace of higher prices—such an unusual reaction for an American politician.
Trump is correct that the economic impact from higher oil prices is different today than it once was. In the late 20th century, higher gasoline spending largely flowed abroad, transferring income to foreign producers and draining purchasing power from the U.S. economy. Today, much of the additional revenue generated by higher oil spending accrues domestically—to producers, refiners, workers, and shareholders.
The problem with celebrating higher oil prices simply because the United States is now the world’s largest oil producer is that Wright’s observation remains true as well. The United States still consumes an enormous amount of oil. Because oil is priced on a global market—and gasoline prices follow—Americans still pay more at the pump.
The dominant effect today is distributional: Most Americans lose, while a relatively small number of firms and investors gain. According to investment bank Jefferies, U.S. producers will generate an extra $5 billion in cash flow this month alone.
But without policy changes, these distributional impacts are still likely to provide a significant hit to GDP. A sustained period of high prices will quickly feed through into households’ weekly bills, reducing their purchasing power and dampening their spending. Although the losses faced by American consumers are now offset by the gains accruing to U.S. oil producers, these gains are unlikely to provide as much boost to spending in the near term. Oil companies’ investment decisions are driven more by long-term price expectations than by short-term spikes. And much of the higher dividends and buybacks flowing to shareholders are likely to be saved in the first instance.
If the incremental spending by companies and shareholders is smaller than the reduction in consumer spending—as research suggests may be the case—the macroeconomic effect of an oil price surge may not differ dramatically from the days when the United States was a major crude importer.
To neutralize the macroeconomic impact of higher oil prices—not to mention the burden on the “99 percent” of Americans that Wright referenced—there needs to be a mechanism to redistribute income from oil producers to consumers, mitigating any reduction in near-term spending.
Most major oil-producing countries have such systems, which is why they welcome price spikes. In Saudi Arabia and other Gulf states, for example, the national oil company is state-owned, and most profits accrue directly to the government. In Russia, the fiscal framework links taxation directly to oil prices: As prices rise, so does the marginal tax rate.
No comparable mechanism exists in the United States. As a result, even though the country is now a major net oil exporter, it is less able to withstand the short-term recessionary effects of price spikes than many of its fellow petrostates. Policymakers therefore continue to focus on lowering oil prices in response to shocks—for example, by releasing barrels from the Strategic Petroleum Reserve or easing sanctions on major producers such as Russia.
Some countries have attempted to address this issue through windfall profits taxes, transferring extraordinary crisis-driven gains from oil companies back to households. Yet such taxes have proved to be difficult to design and implement effectively. They take time to enact, limiting their usefulness in addressing immediate economic shocks, and often remain in place long after the immediate crisis has passed, as the United Kingdom’s recent experience illustrates. Poorly designed levies create fiscal uncertainty and risk discouraging production precisely when additional supply is needed.
A better approach would make the U.S. economy more structurally resilient to oil price shocks, not just today but also in the future. The most effective way to do this involves hardwiring policy mechanisms to redistribute “excess” gains—as well as losses—borne by oil producers to oil consumers.
Strange as it may sound, Russia’s approach may offer some lessons. Linking the tax paid by oil producers to oil prices would mean that as prices rise, so does the marginal tax rate. Relative to the current flat rate tax, the variable tax rate could be calibrated to be fiscally neutral over the long run, with higher taxes implemented as oil prices increase above some base level offset by lower taxes when prices slump below that level. For oil producers, their expected tax burden over the medium term would be unchanged, and they would have the added benefit that their post-tax revenues would be less exposed to the vagaries of global oil markets.
During periods of extraordinary price shocks, government could offset the cost to consumers of higher gasoline prices by sending lump-sum payments to households, knowing that greater revenues would be on the way once tax season rolls around. Lump-sum payments are preferential to subsidizing fuel costs because artificially lowering gasoline prices would distort market signals, weakening incentives for conservation when it is also most needed. Such a system could theoretically be combined with a mechanism allowing consumer fuel taxes to vary with the oil price as well, such that some government revenue lost from companies in periods of low prices would be offset by higher fuel taxes.
Despite the United States’ emergence as the world’s largest oil producer, Trump’s claim that the country benefits from higher oil prices because “we make a lot of money” misses the broader economic reality—both for the macroeconomy and for consumers paying more at the pump. The shale revolution, which transformed the United States from the world’s largest oil importer to a large net exporter, is a game-changer in terms of the ability of the U.S. economy to withstand future oil shocks. But realizing that resilience will require policies that better distribute the gains from oil price shocks.
