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What if oil prices reach $150/barrel? Consequences for growth and inflation in the US and the Euro Area
February 25, 2022 | Chart
The full invasion of Russian armed forces into Ukraine adds pressure to an already volatile energy market. Before the escalation, the expected world oil price was in the range of $80 per barrel for 2022, but this is now likely too low, and market expectations are adjusting. What will be the impact on the economy if oil prices spike to $150?
Growth will surely be affected even if economies around the world don’t immediately tip into recession: in the US, year-on-year economic growth may slow to 3.0 percent in 2022 vs. a forecast of 3.5 percent, and in the Euro Area, 3.4 percent instead of 3.8 percent forecast earlier this year. At the micro level, higher energy bills will pose new challenges for firms to contain costs and ensure production on competitive terms.
However, a simulation by The Conference Board based on the Oxford Economics global model shows that the inflationary impact of a major and prolonged spike of oil prices would be even more significant than the impact on economic growth. 2022 annual average inflation could reach 7.6 percent in the US, and 5.1 percent in the Euro Area, more than a percentage point above earlier forecasts for the full year. Among the consequences: a further deterioration of household purchasing power, already under pressure from rising prices since early 2021.
A major and prolonged spike in oil prices risks exacerbating what are already multidecade high inflation rates and extending this period of elevated price gains even further into the future.
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