Global Economy Risk Assessment
Another Oil Supply Shock Mixed with Questionable Central Bank Credibility Raises the Risks of Persistent Stagflation
By The Better Policy Project | March 30, 2026
A Mounting Storm for the Global Economy
The global economy is entering a new phase of uncertainty as geopolitical tensions in the Middle East disrupt one of the most critical arteries of global energy supply. What initially appeared as a regional conflict has evolved into a systemic risk, with the potential to trigger a large and persistent oil price shock. This comes at a time when inflation has not fully normalized, financial conditions remain relatively supportive, and policy credibility is increasingly being tested. While recent economic data continues to suggest resilience, underlying vulnerabilities are becoming more pronounced, raising the risk that a renewed energy shock could expose deeper imbalances. This report assesses the range of possible oil market outcomes and examines how they may transmit through the U.S. economy under different policy and expectation dynamics.
Oil Price Scenarios and Their Underlying Assumptions
The current disruption in the Strait of Hormuz introduces a high degree of uncertainty into global oil markets, not only in terms of the size of the supply shock, but also its duration and transmission to the broader economy. Rather than a single forecast, the outlook is best understood as a range of plausible scenarios reflecting different geopolitical and market dynamics.
Global oil flows through the Strait of Hormuz
Source: IEA
Against this backdrop, three scenarios are considered, differing primarily in the magnitude and persistence of supply disruption.
The Market Reference Scenario assumes a relatively quick resolution, with oil flows normalizing and prices returning to pre-conflict levels. In this case, the shock has limited and temporary macroeconomic effects.
The persistent disruption scenario (Scenarios 1 and 2) assumes that roughly 6 million barrels per day remain offline for an extended period. While inventories and alternative routes partially offset the shock, supply remains constrained, keeping prices elevated. The key distinction within this scenario is whether inflation expectations remain anchored or begin to amplify the shock.
The oil crisis scenario (Scenario 3) reflects a more severe escalation, with disruptions approaching 10 million barrels per day. Oil prices rise sharply, triggering broader financial and macroeconomic adjustment, with demand compression ultimately driving the resolution.
Across all scenarios, a central constraint is the limited ability of alternative supply channels and spare capacity to fully replace disrupted Gulf exports, increasing the likelihood that shocks persist rather than dissipate quickly.
Global oil flows through the Strait of Hormuz
Source: BPP
United States
The transmission of the oil shock to the U.S. economy depends critically on the interaction between energy prices, inflation expectations, and monetary policy in an environment where underlying inflation remains above target. Despite some cooling in the labor market, sticky price inflation has not fully normalized, leaving the economy more exposed to renewed cost pressures.
Under the Market Reference Scenario, the absence of a sustained oil shock allows inflation, growth, and the policy rate to gradually converge toward their long-run levels. The macroeconomic environment evolves broadly in line with a pre-shock baseline, with no material change in the policy path.
Under Scenario 1, oil prices rise to around $120 and remain elevated for several quarters. The impact is largely concentrated in headline inflation through higher energy costs, while core inflation remains relatively stable. However, given the elevated starting point for inflation, the Federal Reserve is expected to continue tightening policy rather than look through the shock, resulting in a moderation of growth.
Under Scenario 2, the same oil price path leads to a different outcome due to weaker anchoring of inflation expectations. The initial energy shock feeds into core inflation more persistently, requiring a more aggressive increase in interest rates to re-anchor expectations. The tightening in financial conditions becomes a key driver of the slowdown in activity.
Under Scenario 3, a more severe disruption pushes oil prices significantly higher, triggering a sharp deterioration in confidence and a correction in financial markets. Growth contracts and recession becomes unavoidable. In this case, the Federal Reserve shifts its focus from inflation control to supporting the real economy, lowering interest rates as demand weakens and inflation pressures eventually recede.
Oil Prices Across Scenarios
Source: BPP