Investing.cm — Citi Research has simulated the effects of a hypothetical increase in the price of oil to $120 per barrel, a scenario that reflects possible geopolitical tensions, particularly in the Middle East.
According to Citi, such a price increase would result in a significant but temporary economic disruption, with global production losses peaking at around 0.4% relative to the base forecast.
While the impact diminishes over time as oil prices gradually normalize, the economic repercussions are uneven across regions and signal different levels of resilience and policy responses.
The simulated price increase triggers a contraction in global economic output, driven primarily by higher energy costs that reduce disposable income and corporate profit margins.
The global production loss, while substantial at first, is expected to stabilize at 0.3% to 0.4% before fading as oil prices return to baseline forecasts.
The United States shows a more moderate immediate loss of production compared to the Eurozone or China.
This disparity is attributed in part to the United States’ status as a major oil producer, which protects the national economy through wealth effects, such as stock market boosts from energy sector profits.
However, the American advantage is short-lived; Tighter monetary policies to counter inflation cause delayed negative effects on output.
Global headline inflation is expected to rise by about two percentage points, with the United States seeing a slightly steeper rise.
The relatively lower taxation of energy products in the United States amplifies the transmission of oil price shocks to consumers compared to Europe, where higher energy taxes cushion the direct impact.
The responses of central banks diverge depending on the regions. In the United States, where the impacts of inflation are most acute, the Federal Reserve’s reaction function (based on the Taylor rule) leads to an initial tightening of monetary policy. This contrasts with more moderate policy changes in the euro area and China, where central banks are less aggressive in responding to the temporary spike in inflation.
Citi analysts frame this scenario in the context of current geopolitical volatility, particularly in the Middle East. The model assumes a supply disruption of 2 to 3 million barrels per day for several months, underscoring the precariousness of energy markets in the face of geopolitical shocks.
The report points out several broader implications. For authorities, the challenge lies in balancing short-term inflation control with the need to cushion economic output.
For businesses and consumers, a price increase of this magnitude underscores the importance of energy cost management and diversification strategies.
Finally, analysts caution that simulation results may underestimate risks if structural changes, such as the evolving role of the United States as an energy exporter, are not fully reflected in the model.
While the simulation reflects a temporary shock, its findings reinforce the need for resilience in energy policies and monetary frameworks. Whether or not such a scenario materializes, Citi’s analysis offers a window into the complex interplay of economics, energy and geopolitics in shaping global economic outcomes.