Economics Update March 2026 - How dangerous is a high oil price?

In the past, drastic increases in oil prices have repeatedly triggered global recessions. The widespread closure of the Strait of Hormuz as a result of the escalation of the Iran conflict is affecting around 20 percent of global oil supplies and has therefore, unsurprisingly, led to a noticeable rise in oil prices. How dangerous is this for the global economy?

The answer to this question depends primarily on whether this is a temporary event or whether the disruption to oil supplies via the Strait of Hormuz will be prolonged. The initial reaction of the markets indicates that market participants predominantly assume the former, and indeed there are good reasons for this. Iran presumably has sufficient military resources to prevent oil transport through the Strait of Hormuz – drones in particular are likely to play a key role here. Effectively combating drone attacks is a difficult undertaking because they can be deployed in a decentralized manner and the defense missiles are many times more expensive than the drones themselves. However, the Iranian regime appears to be significantly weakened under the pressure of military attacks. From today's perspective, it seems very unlikely that the opposition in Iran itself will be able to take power, but even the current ruling triumvirate, as the immediate successor to the previous leader Khamenei, should have an interest in ending the military conflict as soon as possible, given its own military inferiority to the US and Israel. Khamenei's death opens up the possibility of a more pragmatic approach, primarily geared toward maintaining power. This would mean that the Iranian leadership is responding to the demands of the US and Israel, at least for the time being. Trump could chalk this up as a success, especially since he has no interest in a prolonged conflict given the mood among his supporters. In our baseline scenario, we therefore expect the immediate military conflict to end soon and oil prices to normalize. Although there would be negative consequences for the global economy in this case, they are likely to remain manageable.

Even if oil prices remain high, the consequences could be less severe than in previous cycles. Higher oil prices act as an additional consumption tax and thus dampen overall economic demand. However, because the amount of oil used per unit of economic output has fallen in recent decades, especially in highly developed industrialized countries, this effect is less pronounced. In addition, central banks are unlikely to respond to rising inflation rates resulting from higher oil prices by raising interest rates. On the contrary, they are more likely to try to stabilize aggregate demand by lowering interest rates.

From today's perspective, a further escalation of the crisis in the Middle East, resulting in drastically higher oil prices that trigger a global recession, is a significant risk scenario that warrants ongoing attention. However, there are good reasons not to view this as the base scenario.