Turmoil in the Middle East: Could Resilience Again Prevail?

A new Citi Research report from Global Chief Economist Nathan Sheets and Cole Langlois explores the impacts on the global economy from a sustained disruption in the Strait of Hormuz, and asks whether the resilience we've seen in recent years could again prevail.

Despite a recent de-escalation in the Middle East conflict, the situation remains fragile, with a wide distance between current conditions and a return to genuine stability in the Middle East, or to normal oil flows through the Strait of Hormuz.

This leads us to a key question: How resilient could the global economy be if the Strait were closed or severely disrupted for an extended period? The answer depends on several buffers. Some may come from the energy market itself, via more flexible supply and demand. Others may come from broader macro channels, reflecting the economy’s growing ability to absorb shocks. Recent history gives us some reason for optimism. Over the past few years, the global economy has endured the Russia Ukraine war, central-bank rate hikes and renewed trade tensions, yet growth has continued near trend and inflation has come back down toward pre pandemic norms. Once again, resilience may prevail.

Our analysis starts with the uncomfortable fact that a sustained closure of the Strait would represent a massive oil shock. Roughly 20 million barrels per day of oil and petroleum products move through the Strait. Even allowing for rerouting, pipelines, and some ongoing Iranian exports, we estimate at least 10 million barrels per day could be shut in — nearly 10% of global consumption. The burden of that loss would be felt worldwide, but it would fall especially heavily on Asian economies.

On the supply side, there is some scope for response, but it’s limited and uneven over time. In the short run, the most powerful buffer is global oil inventories. Official and commercial stocks entered this episode at very high levels; IEA countries have already demonstrated their willingness to draw these reserves, and China (which depends heavily on the Strait) is also likely to tap its own stockpiles. We think inventory draws could plausibly offset around 4 million barrels per day for several months.

Beyond inventories, additional supply could emerge, but only gradually. Higher prices would eventually coax more production from outside the Middle East, especially from U.S. shale producers. Ironically, much of the world’s true near term spare capacity sits in Saudi Arabia and the UAE, and would be largely inaccessible during a Strait closure.

Taking these factors together, we see scope for a 4–5 million barrel per day supply side offset, but that still leaves the global economy meaningfully short of oil.

Demand responses, therefore, have to do much of the remaining work. Higher prices are painful, but they are also a mechanism that forces conservation, efficiency, and fuel substitution. Consumers and firms can respond by driving and flying less, improving energy efficiency, and revisiting behaviors such as remote work that reduce fuel use. Governments are already encouraging many of these steps.

Here, Europe’s experience in 2022–23 is instructive: Despite losing nearly half of its natural-gas consumption, Europe avoided the deep recession many feared by combining new sourcing with aggressive conservation. We see similar global possibilities here. Fuel substitution — especially coal in some regions — could save on the order of 1 million barrels per day. Conservation and efficiency efforts could plausibly save another 1 million. Even with these adjustments, however, we still arrive at a net shortfall of roughly 3–4 million barrels per day, consistent with oil prices settling near $100 per barrel.

That brings us to the broader macro question: How much damage would sustained $100-a-barrel oil do to global growth? Historically, oil shocks have been contractionary because they transfer income from oil importers, who spend a lot, to exporters, who spend less. But today’s situation is more nuanced. A key feature of this shock is that Middle East production would be shut in, meaning the main windfall beneficiaries would be exporters such as the U.S., Canada, and Russia. To the extent that these producers recycle income back into spending and investment, the drag on global demand could be smaller than in past episodes, though still meaningful.

Beyond this redistribution, several adjustment channels are likely to be in play. Some households may temporarily lower saving rates to smooth consumption. Governments may try to shield consumers from higher energy prices, but price controls risk delaying the necessary responses and worsening already strained public finances. Monetary policy, meanwhile, has limited room to help, with central banks reluctant to ease aggressively.

Firms may also absorb some of the shock through margin compression, as they did in the face of U.S. tariffs. But this buffer is not without limits, especially for smaller firms already under pressure.

Stepping back, none of these channels alone is decisive, and the ultimate test of resilience rests with households and firms themselves. On that front, we remain cautiously optimistic. Labor markets are still solid, balance sheets are healthier than in past cycles, and monetary policy is no longer deeply restrictive. More broadly, we think the private sector has learned — through repeated shocks — how to adapt more quickly and effectively. The size of shock required to tip the global economy into recession appears larger than it once was.

Finally, it’s worth remembering that the world has lived with $100 plus oil before. From 2011 through much of 2014, Brent averaged around $110 a barrel, yet global growth continued at a respectable pace. High oil prices would clearly be a headwind now, but not necessarily a knockout blow.