The Greatest Risk For The Global Economy Is Stagflation Driven By Governments, Not Oil
The current oil price forward curve shows that the current global energy shock may be significant but short-lived. The forward curve presents a steep disinflationary trend to $80 per barrel by the end of 2026. Markets are discounting a short war with limited impact on supply but immediate ripple effects on markets and importing economies.
In the worst case, a new energy shock triggered by war with Iran would bring stagflation pressures across the global economy, especially in the economies that have been unable to strengthen their energy supply chains since 2022, like the European Union, which is still in a low-growth environment subject to significant impact from energy shocks. Even if the conflict is short‑lived, the disruption to the Strait of Hormuz and Gulf infrastructure has made the oil market go from an oversupply of 4 million barrels per day, according to the IEA, to a tight balance, as shipping routes come under pressure.
The Strait of Hormuz carries almost 25% of seaborne oil exports and a large share of liquefied natural gas (LNG) flows, which makes it the most sensitive energy route. However, 80% of the traffic through the strait goes to Asia, mostly China. That is why the Chinese government has halted all refined product exports from China, trying to limit the risk of supply constraints.
We must also remember that $100 a barrel today is not equivalent to $100 per barrel in 2008. In current dollar terms, the 2008 oil crisis would only trigger at $190 per barrel. Adjusting for inflation is important.
Non-OPEC supply is also a differential factor from other crises, as it has increased significantly since 2008, contributing to a more stable market despite rising prices. The current energy shock is entirely different from 2008 for the United States.
In 2008, the United States production stood at barely 5 million barrels per day. Today, the US is the largest oil producer in the world at 13.7 million barrels per day.
In 2008, dry natural gas output was around 56 billion cubic feet per day. It is projected to reach 106 billion cubic feet daily in 2026. Natural gas energy independence exists in the US, and with the inclusion of Canada and Mexico, North America’s oil independence is nearly complete.
Even considering all these differences compared with other instances, an energy shock would immediately increase fuel prices at the pump but also raise the cost of electricity, heating, fertilizers, plastics, chemicals, and many manufactured goods that depend on petrochemical inputs.
These secondary price effects may quickly feed into consumer and producer inflation, even if other disinflationary factors mitigate the overall CPI impact.
In energy‑importing economies such as the EU, Japan, South Korea, Taiwan, India, and parts of Latin America, higher fuel bills will likely hit households that are already suffering from persistent inflationary pressures due to uncontrolled government spending and money printing.
For countries like Pakistan, which relies heavily on imported LNG, and several Southeast Asian nations, the shock could trigger a relevant balance‑of‑payments stress, currency depreciation, and even the risk of rationing as fiscal buffers are exhausted.
The current level of US dollar reserves of emerging economies is elevated, but not enough to entirely offset the impact of an energy crisis on the purchasing power of their currencies.
If governments decide to “combat” the energy crisis by increasing spending and subsidies, which is the same as printing money, the macroeconomic impact would be stagflationary: higher inflation with weaker or no growth.
The biggest risk for inflation will not be the impact of energy prices only, but the response from governments if they decide to spend and print their way out of the war’s impact.
The most significant risk for the global economy would come if central banks decided to hike rates due to energy price spikes. Hiking rates would halt investment, consumption, and job creation and have no impact on prices driven by an external geopolitical factor.
If the war continues for an extended period, it could lead to a revision in global growth forecasts, which were already weak for 2026. The IMF had already estimated a slowdown to around 3% or less, and the Iran‑related shock may mean tighter financial conditions.
A long war could lead to a domino of recessions in energy-importing regions, while resource-rich exporters would see an economic boost that would not counterbalance the impact on the largest economies, primarily importers.
The greatest risk now is, as always, a domino of policy mistakes.
Developed economies’ governments may feel tempted to spend and print, ignoring the lack of fiscal space and the already persistent inflation created by the errors made during Covid-19 and the political response.
Governments might intensify their deficit spending, and central banks might repeat their mistakes from 2021-2024 by raising rates at the most inopportune time.
Stagflation is an unlikely outcome, but if it arrives, it will be entirely created by policy mistakes from governments and central banks.
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