Oil Shock Hits the U.S. Consumer

Summary

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Podcast Summary: Thoughts on the Market – “Oil Shock Hits the U.S. Consumer”

Date: March 18, 2026
Hosts: Aruna Masinha (Morgan Stanley, US & Global Economics), Ariana Salvatore (Head of US Policy Strategy)

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Episode Overview

This episode examines the ongoing oil disruption in its third week and explores the wide-ranging implications for US consumers, markets, policy, and politics. Hosts Aruna Masinha and Ariana Salvatore break down the potential duration of the conflict, the effectiveness of policy responses, the direct economic impact on US households, and the resulting political pressures—particularly in a key election year.

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Key Discussion Points & Insights

1. Assessing the Oil Disruption and Its Duration

• Uncertainty Over Timeframe:
  Ariana emphasizes the high uncertainty surrounding the conflict’s duration, noting that it's crucial for investors but hard to predict ([00:30]).

  • She highlights three key signals to watch:
    • Prioritization of Conflict Objectives: The Trump administration’s goals vary in scope and timeline.
    • Traffic at the Strait of Hormuz: Movement is limited, with only a "low single digit number of tankers" passing daily, indicating ongoing disruption.
    • Types and Scope of Escalation: Watching for “vertical” (types of weapons/targets) or “horizontal” (regional spread) escalations that could prolong the situation.

  “Right now all of these things are pointing to a slightly longer term conflict than I think most people expected at the start.”
  — Ariana Salvatore ([01:31])

• Policy Responses and Limitations:

  • Policy offsets under discussion include loosening sanctions on Russian oil, or a Jones Act waiver, but Ariana argues these would only partially address the supply gap.
  • The loss is approximately 20 million barrels per day; proposed measures might offset only 7–8 million, “leaving a deficit of about 10 to 13” million barrels per day ([01:54]).

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2. Impact on the US Consumer

• Direct Pass-Through to Households:

  • Aruna notes the difference between previous supply shocks (like tariffs) and this oil shock—higher gasoline prices hit consumers “at the front end and directly” rather than through business cost pass-through ([02:29]).
  • Gasoline is a “good that is actually really hard to substitute away from,” amplifying the direct impact on purchasing power.

• Relative Spending Cushion:

  • Currently, gasoline is 2–3% of US household spending, compared to a longer-term average of 4%, suggesting some initial cushion.
  • However, “consumers have already been stretched by several years of high prices,” leaving less flexibility ([02:54]).

• Spending and Savings Channels:

  • Three main channels identified for consumer impact:

    1. Hit to Real Purchasing Power: Especially hard to offset or substitute.
    2. Precautionary Savings Motive: Uncertainty leads to reduced discretionary spending.
    3. Inflation Expectations: Prolonged disruption may alter longer-term pricing expectations.

    “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 40bps after 12 months. And most of that is really just coming from the impact on good spending, specifically through durable goods.”
    — Aruna Masinha ([04:36])

• Evidence of Changing Expectations:

  • The University of Michigan survey (half pre-conflict, half post-conflict) shows inflation expectations pausing their downward trend and rising for the “bottom income cohort,” who also expect higher unemployment.

    “…inflation expectations did tick up. And interestingly, the strains were the most for the bottom income cohort.”
    — Aruna Masinha ([05:42])

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3. Differentiated Economic Effects: The “K-Shaped” Recovery

• Strain on Lower-Income Households:

  • Ariana asks about the K-shape dynamic: consumption has been led by higher earners, but the oil shock’s greatest stress is on the lower-income side ([06:18]).
  • Aruna responds that extended disruption could also hit upper-income households through weaker asset markets and reduced wealth effects, not just direct gas spending ([06:39]).

• Wider Pressures Possible:

  “Not only might we see a bigger strain on the lower income cohorts… we might actually see some pressures, not through the direct spending channel on gas, but really just, you know, how it's impacting their balance sheets.”
  — Aruna Masinha ([06:50])

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4. Political and Policy Implications

• Affordability Becomes Political:

  • Ariana: With limited policy tools to “mitigate the potential increase in domestic gasoline prices,” the issue is becoming politically salient, especially in an election year ([07:19]).

  • Voters may not prioritize foreign policy, but rising inflation and cost of living quickly become decisive election topics.

    “…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.”
    — Ariana Salvatore ([07:33])

• Gas Prices and Elections:

  • Gas at $3/gallon is manageable for incumbents; $4 is “more politically challenging,” and $5 signals even greater political risk ([07:48]).

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Notable Quotes & Moments by Timestamp

• “There’s very little conviction just because of the uncertainty associated with this conflict.” — Ariana Salvatore ([00:34])
• “At the time that we're recording this, it seems that we're still getting about low single digit number of tankers through the strait on a daily basis.” — Ariana Salvatore ([01:04])
• “Policy offsets are not going to really be enough to mitigate that supply loss… that's really meaningful for markets for consumption, as you well know, and everything else in between.” — Ariana Salvatore ([02:02])
• “The consumer is now going to be living through the supply shock in about five years. So after Covid, after tariffs, here comes the next.” — Aruna Masinha ([02:32])
• “Maybe in the first month you don't react very much, you pull down on some savings, you take out a little bit of short term credit, but the longer it lasts, the bigger the consumption response is going to be.” — Aruna Masinha ([03:50])
• “Inflation expectations did tick up. And interestingly, the strains were the most for the bottom income cohort.” — Aruna Masinha ([05:42])
• “There are limited policy offsets that can be used to mitigate the potential increase in domestic gasoline prices. And that matters a lot for the midterm elections.” — Ariana Salvatore ([07:20])

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Important Segments & Timestamps

• [00:30] – Three key factors shaping the conflict’s duration
• [01:54] – Limits of US policy responses (supply gap persists)
• [02:29] – Oil shock’s direct impact on consumers
• [04:36] – Quantifying the hit to consumer spending
• [05:42] – Inflation expectations on the rise, especially for low-income households
• [06:18] – K-shaped economy and effects across income levels
• [07:19] – Political implications, gas prices as key election variable

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Conclusion

This episode offers a nuanced take on a rapidly evolving oil disruption and its multifaceted impact on the US consumer, economic growth, and the political climate. Both hosts agree that the shock’s duration and severity are highly uncertain, policy responses will only partially offset the blow, and those least financially resilient will bear the brunt first—with broader economic and political effects likely the longer the disruption lasts. Monitoring key metrics like gas prices, inflation expectations, and consumption patterns will be crucial in the coming months.

Transcript

[A]

Welcome to Thoughts on the Market. I'm Aruna Masinha from Morgan Stanley's US And Global Economics teams.

[B]

And I'm Ariana Salvatore, head of U.S. policy strategy today.

[A]

What are the implications of the ongoing oil disruption for the US consumer? It's Wednesday, March 18th at 10am in New York. Arianna, 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.

[B]

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 Strait of Hormuz. And there the Trump administration has spoken about insurance, 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 single digit number of tankers through the strait 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 more so throughout the region, those are really important indicators. And right now all of these things are pointing to a slightly longer term conflict than I think most people expected at the start. Now, in terms of what that means for markets, for domestic gasoline prices, all these are really important questions that I'm sure we're going to get into. But what we should note is that the President has spoken about a number of policy offsets to mitigate those price increases, ranging from the treasury actually loosening up some of the sanctions on Russia to sell some oil. You know, we've heard some talk of invoking the Jones act waiver. That's a temporary fix on net. We think that these policy offsets are not going to really be enough to mitigate that supply loss that we're getting. That's a 20 million barrel per day loss. Some of these efforts mainly will kind of target about 7 or 8 million barrels per day. You're still in a deficit of about 10 to 13. And that's really meaningful for markets for consumption, as you well know, and everything else in between.

[A]

That's really helpful perspective, Arianna. And it's also a useful segue to think about the note that we jointly put out a few days ago and just thinking about what this means for, for the US consumer. And there I think there's the first point to start with is that the consumer is now going to be living through the supply shock in about five years. So after Covid, after tariffs, here comes the next. And I think this particular oil shock is going to be somewhat different from tariffs in the sense that this is going to hit consumers at the front end and directly. This is not something that is going to have to pass through business costs and some of them could be absorbed by businesses and not fully passed on to the consumer. So I think that's an important point. The second point here is that in terms of the share of spending of gasoline out of total spend, we are at pretty low numbers. We're somewhere in the 2 to 3% range. So it could give a little bit of a cushion. So the longer term average can be somewhere about 4%. So there could be some cushion. But we know that consumers have already been stretched by several years of high prices. And so the way that we thought about what some of the channels could be for how higher oil prices which translate into higher gas prices could matter for the consumer, I think there are sort of three to identify. The first one is that it is really just a hit to your real purchasing power because this is a type of good that is actually really hard to substitute away from. And you could look through some of it at the start. So maybe in the first month you don't react very much, you pull down on some savings, you take out a little bit of short term credit, but the longer it lasts, the bigger the consumption response is going to be. And the, the second channel then to identify is you start to build up some precautionary savings motives because there's this uncertainty that's also lasting for some time. And what do you pull back on? You'll typically pull back on discretionary types of spending. And so we sized out this impact to say that 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 40bps after 12 months. And most of that is really just coming from the impact on good spending, specifically through durable goods. So there could be some meaningful impact to real consumers spending in the US if this shock were to go on longer. And the last point I would just say is how do inflation expectations move? Because that's an important point for the Fed and it's an important point for just people who are thinking about their spending decisions over the next year or so. One interesting thing I think came out in the University of Michigan survey that came out this Friday. And this was a preliminary survey. About half of it was conducted before the conflict started and half of it was after the conflict started. And what we saw was that inflation expectations in the, in the year ahead, so the 12 month ahead expectations that had been trending down paused, so they are no longer trending down. And in its release, the University of Michigan noted that for the responses that were collected after the conflict started, inflation expectations did tick up. And interestingly, the strains were the most for the bottom income cohort. So they saw a bigger uptick in inflation expectations. They actually also saw a bigger uptick in unemployment expectations over the next year.

[B]

So, Arun, if I can ask, we've been talking a lot about the K shape economy this year, right? So consumption really being led by the upper, let's call it the upper income cohort when we think about this translation to consumption. Like you said, more of the stress is on the lower income side. How do you square that with the economic impact that you guys are expecting?

[A]

The way that I would square it is the longer it lasts and the greater the sort of uncertainty in asset markets that might actually begin to weigh on the upper income consumer as well. So that might make some of those wealth effects less supportive than what we have seen over most of 2025, just given where consumption has been running in terms of its pace. So not only might we see a bigger strain on the lower income cohorts, as we see this shock lasting longer, we might actually see some pressures, not through the direct spending channel on gas, but really just, you know, how it's impacting their balance sheets.

[B]

And that's a really important point because it also to me resonates with the concept of affordability, which has been a really key political topic for the past few months, I would say. And the way we're thinking about this is like I mentioned, there are limited policy offsets that can be used to mitigate the potential increase in domestic gasoline prices. And, and that matters a lot for the midterm elections. Typically, voters don't really rank foreign policy as a top issue when it comes to their their choice for candidates in midterm elections and elections in general. But 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. And what we've been saying, it's not a perfect rule of thumb, but looking back at the past few elections, if gasoline prices here in the US are something like $3 a gallon, that tends to be pretty good for the incumbent party. Four, let's say, gets a little bit more politically challenging. And five, you know, is when you kind of get into that even more challenging territory for the administration and for Republicans in Congress. So again, not a perfect benchmark, but something that we'll be keeping an eye on too, as this conflict evolves.

[A]

Okay, so we'll be keeping an eye on how that oil disruption plays out and matters for the US Consumer.

[B]

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.

[C]

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