Why high oil prices could send the world into a summer slump

The world economy is headed for a “rare” recession in the middle of this year as a protracted war appears to be on the horizon amid the prospect of US troops moving into the Middle East.

Economists have warned that activity will drop in the middle of the year if oil prices rise to $150 per barrel and stay there for four months.

Oil prices continued to rise on Monday morning as Brent Crude exceeded $116 per barrel amid mixed messages between the US, Israel and Iran on the state of war.

It is the highest level of oil prices reached since the war broke out in the Middle East at the end of last month.

Israeli and US officials have expressed the expectation that a ground war could begin within days. President Donald Trump has said he is considering an attack on Kharg Island, which is responsible for most of Iran’s crude oil supplies.

Reports throughout the US have detailed plans for military operations that could last several months.

The involvement of Houthi fighters near Yemen, another banned group backed by Iran, also increases trade tensions as shipping vessels crossing the Red Sea are at greater risk.

Analysts in the city noted that Trump’s words about the war were taken with a pinch of salt as the growing fear of a shortage of fuel could lead to crude oil hitting $150 per barrel within weeks.

The world economy is set to rise above inflation

Oxford Economics director of global research Ben May has predicted that there will be a disruption in the US economy this year before it recovers in 2027.

May also warned that the economies of Europe and Asia will have a major impact on GDP.

The world economy could face a contraction of almost two percent compared to the previous growth estimates, which makes countries grow by only two percent this year.

Global inflation will also rise to 7.7 percent this year, close to the peak seen in 2022.

The global economy could also suffer from “extremely low levels” of oil supply as a shortage of diesel could cause food prices to rise and transport links to stop.

Shortages of aluminium, sulphur, naphtha and helium could also damage key semiconductor, manufacturing and fertilizer industries.

May wrote: “The speed and magnitude of these energy movements are pushing us into uncharted territory, and it is likely that diesel, jet fuel and marine fuel shortages will cause major job losses this year.”

“While activity may be picking up more quickly, further disruption could cause greater supply pressures and, therefore, higher inflation.”

It is expected that the UK economy will be more affected than other countries due to the dependence on imports for essential goods and the recent woes in terms of price growth and production.

Economists at the OECD, a think tank based in Paris, said that the UK economy will have the second lowest growth this year in the G7 while it has the second highest level of inflation.

Sir Keir Starmer is holding a meeting with key banking, energy and military officials on Monday to discuss the potential impact of the cuts on businesses and households across the country.