Yardeni Research | Between Iran and A Hard Place

💡Dr. Ed's updated base-case scenario for the US economy and stock market by year-end 2026 remains the "Roaring 2020s," with an unchanged subjective probability of 60%. This outlook anticipates continued economic growth despite current geopolitical tensions. The scenario also accounts for potential resilience in the US economy and corporate earnings, assuming the ongoing conflict in the Middle East lasts only a few more weeks. This forecast is a critical component of his executive summary, indicating a prevailing optimistic view for the near-term economic trajectory.

💡For the rest of the decade, Dr. Ed projects two primary scenarios for the US economy: a continuation of the "Roaring 2020s" with a subjective probability of 85%, and a new scenario, the "Stagflating 1970s Redux," with a probability of 15%. This long-term outlook suggests a strong likelihood of sustained economic growth and prosperity as the base case. However, it also acknowledges a smaller, but notable, risk of returning to a period characterized by high inflation and stagnant economic growth, similar to the 1970s.

💡The US economy's energy intensity, measured as total energy consumption per unit of real GDP, has significantly decreased from 1950 to 2024. It has dropped by 70% during this period and by 62% specifically from 1979 to 2024. This substantial reduction indicates a major shift in how efficiently the US economy uses energy, driven by structural changes from energy-intensive manufacturing to services industries, as well as technological advancements and regulatory standards.

💡Services industries and technological improvements play a crucial role in the US energy intensity decline by shifting the economic structure away from energy-intensive manufacturing. The transition to a services-dominated economy inherently reduces overall energy consumption per unit of GDP. Additionally, corporate average fuel economy (CAFE) standards and advancements in internal combustion engines have significantly improved energy efficiency. This combination of structural economic change and technological progress has substantially lowered the nation's energy intensity from 1950 to 2024.

💡US crude oil production, including natural gas plant liquids and renewable fuels/oxygenates, has reached a record 24 million barrels per day (mbd), significantly exceeding US usage of 21 mbd. This surplus has transformed the US into a net exporter of approximately 3.0 mbd. This marks a substantial reversal from 2007, when the US was a net importer of about 12 mbd, highlighting a dramatic increase in domestic production and energy independence.

💡In 2007, the US was a net importer of about 12 million barrels per day (mbd) of crude oil. In stark contrast, the US is currently a net exporter of around 3.0 mbd, with production at a record 24 mbd, exceeding usage of 21 mbd. This represents a significant reversal in the US's oil trade status, moving from heavy reliance on foreign oil to energy independence and a net export position within less than two decades.

💡The 'stagflation' periods following the 1973 and 1979 oil shocks were characterized by a rare and painful combination of stagnant economic growth, high unemployment, and rising inflation. The October 1973 OPEC embargo quadrupled crude oil prices, leading to long lines at gas stations and fuel rationing. The 1979 Iranian Revolution further disrupted global oil supplies, more than doubling prices and pushing an already fragile economy deeper into stagflation, with both crises triggering two recessions during the 1970s.

💡The probability of a US recession, according to Polymarket, jumped to a three-month high of 34% on Friday from 21% on Wednesday, February 25, just before the recent war began. This significant increase of 13 percentage points reflects heightened concerns about the economic impact of the conflict, including potential oil shocks and disruptions to global supply chains. The rapid escalation in perceived recession risk underscores the market's sensitivity to geopolitical instability.

💡The Iranian regime currently faces a massive breakdown in command and control, particularly regarding the IRGC, following the death of Supreme Leader Ayatollah Khamenei on February 28. Despite President Masoud Pezeshkian's public apology for Iran's attacks, the IRGC immediately undercut him by launching fresh strikes, demonstrating their decentralized structure and independent actions. Local IRGC commanders are acting autonomously, launching retaliatory drone and missile barrages, indicating that the IRGC, designated as a Foreign Terrorist Organization, operates as a "terrorist state within a terrorist state" without centralized leadership.

💡Fertilizer shortages stemming from the Strait of Hormuz blockade are likely to push food prices higher in late 2026. Approximately 25%-33% of the world’s nitrogen fertilizer market passes through this strait, and disruptions from Iranian drone strikes on key production hubs like Qatar's Ras Laffan industrial complex (a major source of natural gas for nitrogen-based fertilizers) will reduce supply. If the blockade continues past early April, farmers may switch to less nitrogen-intensive crops or apply less fertilizer, leading to lower yields and a secondary "food price shock."