Investing.com — Europe’s economy is about twice as sensitive to shocks as the United States, across both inflation and growth, a Bank of America economist says, as disruption to global energy supplies from the effective closure of the Strait of Hormuz continues to reverberate.
Using a vector autoregression model, global economist Antonio Gabriel found that a 10% oil price shock raises Euro area inflation by around 40 basis points and shaves more than 10 basis points off growth — both roughly double the equivalent impact on the U.S.
“We think the larger share of energy in Europe’s consumption basket, as well as the region being an oil importer, explain the results. Our findings suggest that Europe will take a larger hit from the energy shock compared to the U.S., Gabriel wrote in a Thursday note.
The economist notes that the U.S. “has gradually become less sensitive to oil,” making a repeat of the 1970s-style stagflationary episode appear unlikely. “However, inflation and growth in the Euro area are more sensitive to oil prices than in the U.S., warranting more caution,” he added.
The European Commission on Wednesday warned member states that if the Iran conflict continues, energy markets face a prolonged supply shock that could force cuts in fuel consumption across the bloc, Reuters reported.
While Europe has not yet experienced physical shortages, it is contending with surging oil and prices, and airports have flagged the prospect of jet fuel shortfalls within weeks.
The Commission outlined two broad scenarios in a closed-door briefing with EU ambassadors, the report said.
If the ceasefire between the U.S. and Iran holds and the Strait of Hormuz reopens, oil and gas flows would recover within months, with diesel and jet fuel prices easing by late summer. The global LNG market, however, would likely remain tight through the end of the decade due to infrastructure damage in Qatar.
In the more adverse scenario, where tensions persist, Europe could struggle to replenish gas storage ahead of winter and face extreme price spikes with cascading effects across industrial supply chains, an outcome the policymakers described as risking outright “demand destruction.”