Key Takeaways
This paper explores two scenarios for the potential economic effects of a Middle East war that causes a spike in energy prices. In the first, oil prices surge for one year to around $120 per barrel, while prices also rise sharply for liquefied natural gas, refined petroleum, and fertilizer. In the second, energy prices remain elevated for three years. We find in both scenarios, relative to our baseline projections:
- Global growth slows, leaving 2026 GDP lower and inflation higher in most economies, but the economic effects are spread unevenly. Countries more dependent on Middle Eastern oil, natural gas, and fertilizers generally experience the largest declines in GDP and increases in inflation.
- Emerging economies generally are hit harder than advanced economies because higher fertilizer costs hurt agricultural production, which accounts for a larger share of emerging economies.
- The US economy is one of the least affected overall: 2026 GDP is around 1.2 percent lower, but certain sectors slow more, particularly transportation, agriculture, and durable manufacturing.
- China's 2026 GDP is around 1.8 percent lower—despite its large domestic supplies of oil, gas, and fertilizer—as slowing global growth weakens demand for its exports.
This paper explores two scenarios for the potential economic effects of a Middle East war that causes a spike in energy prices. In the first, oil prices surge for one year to around $120 per barrel, while prices also rise sharply for liquefied natural gas, refined petroleum, and fertilizer; in the second, energy prices remain elevated for three years. We find in both scenarios, global growth slows relative to our baseline projection, but the effects are felt very unevenly. Countries dependent on Middle Eastern oil, petroleum, natural gas, and fertilizers experience the largest declines in GDP and increases in inflation. The effects on different sectors vary according to their energy sources, both directly through different energy dependence and indirectly through production networks. Also, trade relationships matter because as the global economy slows, countries such as China experience a decline in export demand, worsening GDP losses, even though China has large domestic supplies of oil, gas, and fertilizer.
