Why Oil Price Spikes Cause Recessions But High Prices Don't

LeadershipLeadership StrategiesWhy Oil Price Spikes Cause Recessions But High Prices Don'tByBill Conerly,Senior Contributor.Forbes contributors publish independent expert analyses and insights. Bill Conerly connect the dots between the economy ... and business!Follow AuthorMay 19, 2026, 07:30am EDT--:-- / --:--This voice experience is generated by AI. Learn more.This voice experience is generated by AI. Learn more.Oil tankers in the Strait of Hormuz. (Photo by Asghar Besharati/Getty Images)Getty ImagesRising oil prices often trigger recession, but high and stable oil prices don’t. This distinction is key to understanding the effects of the current jump in energy costs that resulted from closure of the Strait of Hormuz.The historical record shows that recessions are quite common after run-ups of oil prices. In some cases, rising oil prices were part of a general inflation which the Federal Reserve (or another country’s central bank) tried to reverse through tighter monetary policy. In other cases, the oil price shock itself triggered the recession. That’s the kind of recession we need to understand in 2026.Begin by imagining two economies that are similar except for energy prices. They do not trade with one another. In Scarcia, oil prices have been $100 a barrel for several years, with little expectation that they will change. Abundia, however, enjoys cheap energy: oil has sold for $50 a barrel for many years with no expectation of a change. Both places have full employment and low inflation, but there are differences. In Scarcia commuters more often take public transit or drive fuel-efficient cars. They avoid buying energy-intensive goods. Businesses set up their manufacturing processes with a sharp eye on energy costs.In Abundia, most people drive to work, and they love big trucks and SUVs. They find energy-intensive products to be good value. Companies manufacture with a greater eye on labor costs than energy savings. The Abundia people enjoy a slightly highe...