Higher oil prices do not affect the global economy solely through more expensive gasoline and diesel. Above all, they represent a widespread supply shock that increases production and transportation costs in nearly every sector. Oil is used in chemicals, plastics, fertilizers, aviation, maritime transport, and logistics, so its rising cost quickly drives up the prices of a wide range of goods and services. Companies’ margins are shrinking, and if they have sufficient market power, they pass on the higher costs to prices. This intensifies inflationary pressures even outside the energy component of the consumer basket.
The second channel is the erosion of real household incomes. As spending on energy, heating, transportation, and goods made from petroleum derivatives rises, less money remains for other consumption. Households therefore cut back on purchases of discretionary goods, services, travel, and household furnishings. Higher oil prices thus act as a hidden tax that dampens demand and slows economic growth, particularly in economies dependent on energy imports.
The impact on monetary policy is also significant. Central banks usually cannot eliminate an oil shock on their own, but must respond to its secondary effects. If rising oil prices increase core inflation or inflation expectations, the likelihood of higher interest rates for a longer period increases. The CNB had already begun to slowly create room for further rate cuts at the start of the year, but Iran has somewhat taken the wind out of its sails. PRIBOR rates, which just two weeks ago were pricing in a possible CNB rate cut, are now rising again. This further increases the cost of borrowing for businesses and households, curbs investment, and cools real estate markets. The result could be an unpleasant combination of weaker growth and higher inflation.
At the same time, rising oil prices are redistributing income among countries. Oil exporters are seeing higher revenues, while importers face a worsening trade balance, pressure on their currencies, and higher financing costs. Emerging economies with high energy imports and weaker currencies are particularly vulnerable. Higher oil prices can thus worsen countries’ fiscal positions, increase external imbalances, and amplify global uncertainty through financial markets.
In summary, this is a shock that increases inflation, reduces purchasing power, curtails investment, and dims the outlook for global growth.