Oil at $100 and new tariffs deliver dual shock to economy

Brent crude crossed $100 a barrel for the first time in eight weeks on July 23 as the US-Iran war opened a second maritime chokepoint in the Red Sea, while the Trump administration announced fresh tariffs that compound the inflationary pressure on an already slowing global economy.

"The combination of an energy supply shock and a trade-policy shock is the worst possible outcome for central banks trying to navigate a soft landing," said Helima Croft, head of global commodity strategy at RBC Capital Markets. "Each one independently would be manageable. Together, they create a stagflationary dynamic that monetary policy is poorly equipped to address."

Brent crude surged to $98.44 a barrel in early New York trading before breaching the $100 threshold, according to NBC News, after Iran-backed Houthi militants struck two Saudi oil tankers — the Encelia and the Layla — in the Red Sea. The attack opened a second disruption to global energy routes alongside the Strait of Hormuz, where the US-Iran conflict has already restricted flows. The yield on the US 10-year Treasury rose 2.2 basis points to 4.677%, while Germany's 10-year Bund climbed to 3.19%, near its multi-year high. The ECB held its deposit rate at 2.25% on July 23, but money markets now price a 70% probability of a September hike.

The dual shock threatens to push inflation higher just as growth is faltering. Eurozone GDP contracted 0.2% in the first quarter, and the ECB's own projections show headline inflation remaining above 3% well into next year. With the Fed holding at 3.50% to 3.75% and the ECB signaling potential tightening, the risk is that policymakers are forced to raise rates into a downturn — the classic stagflation trap that defined the 1970s.

Two Chokepoints, One Price Signal

The Bab el-Mandeb Strait, an 18-mile-wide waterway between Yemen and the Horn of Africa, handles about 10 percent to 12 percent of global maritime trade and one-quarter of container traffic. Before this week, Saudi Arabia had been routing crude oil through an overland pipeline to the port of Yanbu specifically to bypass the Strait of Hormuz. The Houthi blockade on Saudi-linked shipping, announced July 22 and executed with missile strikes the following day, effectively closed that alternative route as well.

The International Energy Agency described the Middle East war as having produced the largest supply disruption in the history of the global oil market. Its July report said global supply remained well below pre-war levels despite a partial recovery in Gulf exports during June. The last time oil traded above $100 for a sustained period was following Russia's invasion of Ukraine in 2022, when Brent peaked at about $128 a barrel. The 2008 spike to $146 was driven by surging demand from China and supply constraints — a fundamentally different dynamic from today's conflict-driven disruption.

Central Banks Face a 1970s-Style Dilemma

The ECB's decision to hold rates on July 23 was never in doubt — July is a non-projection meeting, and the bank publishes updated macroeconomic forecasts only four times a year. The real test comes Sept. 10, when Lagarde will have two additional months of inflation data, second-quarter GDP figures, and a complete set of staff projections to anchor a decision.

The key variable is whether energy price spikes begin feeding into wages and services prices — the so-called second-round effects that turned the 1973 oil shock into a decade of stagflation. Eurozone services inflation held at 3.2 percent in June, and core inflation fell only modestly to 2.4 percent from 2.6 percent in May. Research from the Centre for Economic Policy Research suggests the pass-through from oil prices to wages runs more than twice as high when underlying inflation exceeds 4 percent — a threshold the eurozone has not yet crossed but could approach if oil stays above $100.

The new tariffs add a second layer of complexity. The Trump administration's "forced labor" tariffs, enacted July 24, affect goods produced under specific labor conditions, while additional measures announced July 25 target a broader set of imports. Trade policy operates on a slower transmission mechanism than energy prices, but the cumulative effect is the same: higher input costs for manufacturers, reduced margins for retailers, and less purchasing power for consumers already squeezed by elevated energy bills.

For investors, the path forward depends on whether the conflict remains contained or escalates further. A credible de-escalation could remove part of the geopolitical risk premium relatively quickly, pulling Brent back below $90 and easing pressure on central banks. Further attacks on tankers or energy infrastructure could push oil toward the Russia-Ukraine highs of about $128 a barrel, forcing the ECB to hike in September and the Fed to reconsider its hold posture. The one certainty is that the next six weeks — between now and the ECB's Sept. 10 meeting — will determine which scenario plays out.

This article is for informational purposes only and does not constitute investment advice.