The threat of escalating conflict between Israel and Iran has returned geopolitical risk to the heart of the global oil market. Yet, according to Ben May, Director of Global Macro Research at Oxford Economics, the macroeconomic fallout—even in the most extreme case—may be mild.

“The Middle East tensions represent another adverse shock to an already weak global economy,” May said in an emailed note. “But our modelling suggests that even the most severe downside outcome would have a manageable impact on global economic activity.”

Oxford Economics’ Global Economic Model (GEM) was used to simulate three adverse oil supply scenarios. Even in the worst case, global GDP in 2026 would be only 0.3% below baseline, with annual growth reduced by 0.1 percentage point in both 2025 and 2026. The United States and Eurozone would bear a slightly greater impact, with GDP growth coming in at 0.4% and 0.5% below baseline next year, respectively.

Oxford Economics’ three adverse scenarios are:

De-escalation and sanctions on Iran: The Israel-Iran attacks cease and fears of a large contraction in oil supply ebb. However, the West imposes tougher sanctions on Iran, which, other things being equal, reduces global oil production by 0.7mn barrels per day (bpd) or around 1% of global supply. This results in the Brent oil price rising to $75pb and remaining at least $6pb above our baseline over the next couple of years.

“By early next year, the higher oil price reduces the level of global GDP by just 0.1ppt,” says May.

Global growth: down by 0.1%

Iranian production is shut down: The attacks continue from both sides. Israeli attacks on oil infrastructure bring to a halt all exports of oil from Iran, effectively reducing global oil supply by 3.4mn bpd or 4% of global supply, other things being equal. This pushes the oil price to around $90pb, where it remains through to the end of 2026.

“World CPI inflation rises from 3.5% in the second quarter 2025 to a peak of 4.5% in late 2025 and early 2026,” May said. The US would see headline inflation peak near 4.5%, while the Eurozone’s inflation peak would reach 2.6%.

Global growth: down by 2.3%

Iran closes the Strait of Hormuz: A more extreme scenario is that Iran, unable to export oil itself, tries to create chaos by attempting to close the Strait of Hormuz. This shuts down oil exports from Kuwait and Qatar, and also restricting oil exports from Iraq, the UAE, Oman and Saudi Arabia. We assume Brent spikes to around $130pb and then falls back once the Strait reopens. However, the episode leads to a hefty risk premium remaining in the oil price. US CPI inflation might approach 6%, with the Eurozone hitting around 3.7%. Though the spike would erode real incomes and dampen consumer spending, May said.

“In the most extreme scenario, world and US CPI inflation peak at almost 6%, with Eurozone inflation's peak again lower, at about 3.7%. Although the price shock inevitably dampens consumer spending because of the hit to real incomes, the scale of the rise in inflation and concerns about the potential for second-round inflation effects likely scupper any chance of rate cuts in the US or elsewhere this year,” says May.

Despite higher inflation, central banks may delay responding. “Given the already uncertain economic backdrop, we're sceptical that central banks would quickly respond to a spike in inflation by hiking interest rates,” said May. However, he added, “a significant surge could persuade them to postpone further rate cuts until at least the start of 2026.”

“Overall, our GEM simulations suggest the impact of the spike in inflation on real activity is mild. Global GDP is about 0.3% below baseline in this scenario in 2026, reducing GDP growth to 2.3% in 2025 and 2.2% in 2026, compared with our baseline forecast of 2.4% for both years. The hit to activity is slightly larger for the US and Eurozone – GDP is 0.4% and 0.5% below baseline next year, respectively,” says May.

Still, the model does not incorporate financial contagion. “The hit to activity could prove larger if, for instance, tensions in the Middle East trigger a bigger asset-market selloff than the model captures,” May warned.