Higher oil prices from the war in the Middle East: assessing the headwinds for euro area growth

Oil supply disruptions related to the war in the Middle East have triggered a sharp rise in oil prices, posing headwinds for euro area economic activity. This box assesses the macroeconomic effects of the shock using a Bayesian vector autoregressive model with identified geopolitical oil supply shocks. The results suggest that supply-driven oil price increases associated with geopolitical events have a persistent negative effect on euro area growth, operating through lower private consumption and investment. Historical evidence from past geopolitical oil supply disruptions indicates that the current shock is likely to weigh noticeably on euro area growth, although the magnitude of the effects remains uncertain and will depend on the future path of oil prices and the evolving geopolitical situation.