Citi Research has conducted a simulation to analyze the potential effects of a hypothetical oil price surge to $120 per barrel, reflecting possible geopolitical tensions, especially in the Middle East.
According to Citi, such a price increase would lead to a significant but temporary economic disruption, with global output losses peaking at approximately 0.4% compared to the baseline forecast.
While the impact diminishes over time as oil prices normalize, the economic consequences vary across regions, highlighting differences in resilience and policy responses.
The simulated price hike triggers a decline in global economic output, primarily driven by higher energy costs reducing disposable incomes and corporate profits.
Although the initial global output loss is substantial, it is projected to stabilize between 0.3% and 0.4% before fading as oil prices return to baseline levels.
The United States experiences a less immediate output loss compared to the Euro Area or China, partly due to its leading role as an oil producer, which helps cushion the economy through wealth effects.
However, the U.S. advantage is short-lived, as tighter monetary policies to combat inflation result in delayed negative impacts on output.
Global headline inflation is projected to increase by around two percentage points, with the U.S. seeing a slightly more significant rise.
Differences in energy taxation between the U.S. and Europe amplify the pass-through of oil price shocks to consumers in the U.S. compared to Europe.
Central banks’ responses vary across regions, with the Federal Reserve in the U.S. taking more aggressive measures to address inflation compared to central banks in the Euro Area and China.
Citi’s analysts contextualize this scenario within ongoing geopolitical volatility, particularly in the Middle East, emphasizing the vulnerability of energy markets to geopolitical shocks.
The report highlights the challenge for policymakers in balancing short-term inflation control with supporting economic output and emphasizes the importance of energy cost management and diversification strategies for businesses and consumers.
The simulation’s results may underestimate risks if structural changes, such as the U.S.’s evolving energy role, are not fully considered, reinforcing the need for resilience in energy policies and monetary frameworks.
Ultimately, Citi’s analysis provides insight into the intricate interplay of economics, energy, and geopolitics in shaping global economic outcomes, underscoring the importance of preparedness in the face of potential shocks.