Why hasn’t the economy suffered a greater shock as oil prices have surged?

  • Oil prices have risen significantly since the Iran conflict began, but high-frequency data indicate that emerging-market growth has remained broadly stable above trend. Although inflation has risen, the increase has been smaller than expected, and Goldman Sachs believes a repeat of the 2021–2022 inflation shock is now less likely.
  • Some of the cushioning comes from temporary factors: governments have used subsidies, taxes and price controls to limit increases in retail fuel prices, while AI investment has offset some of the pressure on growth; weak food inflation and stronger emerging-market currencies have also eased overall inflation.
  • The shock itself has also been milder. Since the conflict began, real oil prices have averaged about 25% above their 50-year average; including refining margins, they have been about 50% higher, whereas oil prices exceeded twice their long-term average in several past crises. A decline in the fossil-fuel intensity of production has also weakened the impact of oil prices.

How much would a further rise in oil prices affect growth and inflation?

  • Goldman Sachs estimates that a 10% rise in oil prices lowers the level of real GDP in oil-importing economies by an average of 0.2 to 0.3 percentage points over one to two years; if the rise is driven by a supply shock, the loss increases to 0.5 to 0.6 percentage points.
  • The difference lies in the circumstances behind the price rise: demand-driven increases in oil prices usually accompany stronger global economic activity, which can partly offset higher import costs; price increases caused by reduced supply have a greater impact on growth in importing countries.
  • The same 10% rise in oil prices raises the level of the consumer price index (CPI) by an average of about 0.3 percentage points within one year, with blended estimates across economies ranging from 0.1 to 0.7 percentage points. Goldman Sachs also cautions that oil prices could rise further and have a significant impact.

Which economies face the greatest pressure, and which might benefit?

  • Goldman Sachs’s blended estimates show that emerging-market Asia is the most vulnerable to the shock: the larger declines in GDP are concentrated in the region, and its current accounts are also among the more severely affected. Gulf oil exporters and Kazakhstan are among the more obvious beneficiaries.
  • The direction of the impact on external balances depends mainly on net oil exports as a share of GDP. Higher oil prices quickly change import bills or export revenues, and most of the current-account impact appears within one to two quarters.
  • Inflation pass-through also depends on fuel-pricing regimes. The average CPI weights of transport fuels and lubricants in emerging markets and advanced economies are 3.9% and 3.3%, respectively, but taxes, subsidies and price controls differ, so oil price pass-through can vary even where the weights are similar.

How should these shock estimates be understood?

  • Growth estimates are particularly sensitive to the type of shock, sample period and model specification. To reduce reliance on any single statistical result, Goldman Sachs calibrates its estimates using each country’s net fuel exports as a share of GDP: the calibration accounts for 70% of the GDP estimate, while calibration and statistical results each account for half of the current-account estimate.
  • Distinguishing supply shocks from demand shocks is not easy: Goldman Sachs believes the current price rise stems from reduced Gulf supply, but because global growth accelerated both before and after the shock, many statistical identification methods would classify it as a demand shock. A common model helps comparisons across countries, but may also fail to fully capture country-specific circumstances.