Citi predicts a rise in global oil prices to $120/bbl. Here’s what happened with Investing.com
Investing.cm — Citi Research has simulated the effects of a hypothetical increase in oil prices to $120 per barrel, a scenario that reflects global tensions, particularly in the Middle East.
According to Citi, such a price increase will lead to a major but short-term disruption to the economy, with global output losses up by around 0.4% compared to the original forecast.
Although the impact diminishes over time as oil prices gradually normalize, economic dynamics are uneven across regions, flagging varying levels of resilience and policy responses.
The simulated price increase results in a decrease in global economic output, primarily driven by higher energy costs that reduce disposable income and business profit margins.
Global production losses, although initially large, are expected to stabilize between 0.3% and 0.4% before fading as oil prices return to baseline forecasts.
The United States shows a more muted output loss compared to the Euro Area or China.
This difference is partly due to the US’s status as a leading oil producer, which shields the domestic economy from wealth effects, such as stock market gains from energy sector gains.
However, the US advantage is temporary; tight monetary policies to combat inflation lead to delayed negative effects on productivity.
Headline inflation around the world is expected to increase by around 2 percent, with the US expected to see a larger increase.
Relatively low taxes on energy products in the US increase the pass-through of oil price shocks to consumers compared to Europe, where high energy taxes block the direct impact.
Central banks’ responses vary across regions. In the US, where the effects of inflation are greatest, the operation of the Federal Reserve—based on Taylor’s law—leads to the initial tightening of monetary policy. This contrasts with more subdued policy changes in the Euro Area and China, where central banks have been less aggressive in responding to transient inflation.
Citi analysts place this situation within the context of the ongoing dynamics of the world, especially in the Middle East. The model assumes a supply disruption of 2-3 million barrels per day over several months, underscoring the vulnerability of energy markets to global shocks.
The report flags several wide-ranging implications. For policymakers, the challenge lies in balancing short-term inflation control with the need to moderate the economic impact.
For businesses and consumers, this price increase underscores the importance of energy cost management and diversification strategies.
Finally, analysts warn that simulation results may underestimate risks if structural changes, such as the changing role of the US as an energy exporter, are not fully captured in the model.
Although the simulation shows short-term shocks, the findings reinforce the need for robustness in energy policies and monetary frameworks. Whether or not such a scenario occurs, Citi’s analysis provides a window into the complex interplay of economics, power, and state politics in shaping global economic outcomes.
