(Bloomberg) -- President Donald Trump’s decision to pull out of the Iran nuclear accord and impose sanctions on that nation also risks fallout for the U.S. economy.
The U.S. move may lead to “gradually and modestly reduced oil production” by Iran, the world’s fifth largest producer, that would further push up global oil prices, according to a research note Tuesday by Gregory Daco, chief U.S. economist at Oxford Economics. If West Texas Intermediate crude oil prices average $70 a barrel this year, that would amount to a drag on growth worth half of the 0.7 percentage-point boost from tax cuts and a government-spending increase, Daco wrote.
With gasoline prices already squeezing consumers’ pocketbooks, the possibility of extended pain at the pump casts a shadow on widespread expectations that U.S. household spending is poised for a rebound in coming months driven by tax cuts. At the same time, energy-producing businesses and regions within the U.S. would benefit from higher oil prices.
The price of WTI crude topped $70 a barrel on Monday for the first time since 2014, amid upward pressures from weaker supply, stronger demand and geopolitical uncertainty surrounding the Iran sanctions, Daco wrote. He published the comments after Trump announced his decision on the Iran accord.
Other economists also estimate fuel bills could erode the boost to paychecks from lower taxes. Rising prices for gasoline act like a tax hike on consumers, and if the current price is sustained, “as much as one-third of the benefit from lower withholding this year could be wiped out,” Morgan Stanley analysts led by Ellen Zentner, chief U.S. economist, wrote in a note on Tuesday.
They estimate a 36-cent increase in the average price of gasoline this year from the 2017 average “steals” an annualized $38 billion in spending from elsewhere, or about one-third of the direct benefit to households from lower withholding of taxes from employee pay.
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