America benefits from not being a manufacturing powerhouse—it shields the U.S. economy from the worst effects of the oil shock, says top economist

(SeaPRwire) –   Americans are suffering from the effects of the Iran war—now in its ninth week—where the blockade of the Strait of Hormuz has effectively halted more than 20% of the world’s energy supply, prompting countries worldwide to scramble for alternatives. In the U.S., average gas prices have surpassed $4.45, with some areas reaching as high as $6, marking the highest levels since 2022. March saw the largest increase in core inflation at 0.7% in three years amid rising oil prices. Staple produce such as tomatoes, bananas, and yellow onions has already become more expensive since the conflict began. Due to increasing fertilizer costs—critical chemicals traded through the strait—food prices are expected to continue climbing as farmers struggle to afford them.

Yet despite these challenges, one economist believes the situation could be far worse.

Eswar Prasad, a senior professor of trade policy and economics at Cornell University, explained that Americans should thank the U.S. for no longer being a major manufacturing powerhouse, having shifted toward a service-oriented economy instead. This transformation has reduced the nation’s reliance on oil compared to half a century ago.

“The surge in prices we see at the gasoline pump is a direct result of rising oil prices,” Prasad stated. “However, the overall economic disruption is limited because the U.S. is no longer the industrial giant it once was.”

The U.S. has avoided the severity experienced by other nations following the war with Iran, which severely disrupted global energy supply chains. Countries like Pakistan, Indonesia, and the Philippines are facing critical oil shortages. According to International Energy Agency chief Fatih Birol, Europe may only have about three weeks of jet fuel remaining.

The U.S. position as a net oil exporter—exporting approximately 10.15 million barrels per day while importing about 8.5 million, as of 2023, based on government data—has also helped cushion the impact of the oil shock. However, Prasad argues that America’s greatest defense against an energy crisis has been developing over decades.

The Decline of U.S. Manufacturing

World War II triggered an industrial boom in the U.S., peaking in 1979 when manufacturing employment reached a record high of 19.6 million. Part of this growth occurred despite the U.S. increasingly relying on cheaper overseas labor for manufacturing. The Baby Boomer generation also contributed to expansion, becoming more educated and affluent than previous generations. As this generation matured and more women entered the workforce, the U.S. began moving away from its manufacturing dominance. By June 2019, manufacturing employment had dropped by over a third (35%) from its 1979 peak to 12.8 million jobs.

Instead, the U.S. underwent a white-collar revolution. President Jimmy Carter introduced deregulation, eliminating distinctions between commercial banks, savings and loan associations, and credit unions, making financial institutions more competitive and market-driven. Airlines were freed from route and fare restrictions imposed by the Civil Aeronautics Board, shifting control to the Federal Aviation Administration, which now focuses primarily on air traffic and safety. Computers and the rise of information technology further accelerated this transition.

Despite these new economic foundations, the Trump administration attempted to revive manufacturing by imposing tariffs to discourage companies from relocating factories abroad. However, these efforts appear ineffective, with manufacturing losing around 108,000 jobs in the first year of President Donald Trump’s second term. Economists attribute these losses to the tariffs themselves, suggesting they hindered U.S. companies’ ability to expand and hire. Others argue that Trump’s immigration crackdown worsened labor shortages and production inefficiencies. Nevertheless, these disruptions have had less impact on U.S. GDP due to manufacturing’s smaller role in the economy compared to other countries.

“The damage to the U.S. production system is significantly milder than in many other countries, including advanced economies like Germany, which remains far more dependent on manufacturing than the United States,” Prasad explained. “This naturally limits the shock’s impact.”

According to Eurostat data, Germany derives roughly 20% of its gross economic value from manufacturing—a much larger share than the European Union’s 15.9%. In April, the German government allocated €1.6 billion ($1.9 billion) to provide fuel price relief to businesses and consumers by slashing energy taxes on diesel and petrol. A spring economic forecast now projects Germany’s GDP to grow by just 0.6% in 2026, down 0.6 percentage points from a previous fall 2025 projection.

“This war is the true cause of the problems we are experiencing domestically,” Chancellor Friedrich Merz told reporters last month.

Merz has been particularly vocal about the war—much to former President Trump’s displeasure. Last week, Trump withdrew 5,000 U.S. troops from Germany after Merz criticized what he called Iranian leadership’ humiliating treatment of the U.S. In an interview Sunday, Merz downplayed Trump’s decision and emphasized that Germany remains open to collaborating with both the current administration and Trump.

The Surge in U.S. Productivity

It’s not just a service-based economy keeping the U.S. resilient, Prasad noted. Since late 2019, the U.S. has experienced a productivity surge that outpaced the UK, Canada, and Europe.

“That’s what has kept the U.S. economy strong during such a challenging global period,” Prasad said. “I believe it continues to make the American economy far more resilient to this or any future shock than other economies.”

While economists remain uncertain about the causes behind the productivity boom—whether due to remote work trends or AI-powered automation—greater productivity typically translates into stronger economic growth without triggering inflation. If AI is indeed driving this surge, however, shortages of helium used in semiconductor chip production—exacerbated by the Iran war—could slow technological advancements.

Prasad remained confident in the U.S.’s resilience compared to heavily industrialized counterparts: “Even before this shock, the U.S. was best positioned to withstand any major global crisis.”