As the conflict in the Middle East continues, uncertainty around oil prices has surged to levels last seen in the 1970s—and that is bad news for the global economy.
When energy supplies are disrupted, as they have been by the ongoing conflict in the Strait of Hormuz, we often treat high oil prices as the primary source of risk. And rightly so—transport, utilities, groceries, and production all become more expensive when oil prices jump.
But it is not just the level of prices that matters; not knowing where prices will go next also causes trouble. Volatility and uncertainty in oil prices makes it difficult for businesses and households to plan, which alters behavior, generating substantial economic impact and affecting our daily lives.
Oil price uncertainty (OPU)—measured by the OPU index we created—spiked sharply in February 2026 with the turmoil in the Middle East (see chart). The index is created by analyzing thousands of news articles each month to see how often journalists talk about uncertainty in oil prices. As the chart shows, the index captures key episodes of oil market turmoil over the past 50 years—including conflicts, geopolitical shocks, supply disruptions, and financial crises—highlighting periods of heightened oil price uncertainty reflected in public discourse. The index is currently at its highest level in almost half a century—the last time it was this high was during the Iranian Revolution in the late 1970s.
Recent news coverage shows that the spike corresponds to the market’s reaction to the risk of wider supply disruptions, especially the possibility of a prolonged blockage in the Strait of Hormuz. Because the strait is a critical route for global oil shipments, used to ship around 25% of the global seaborne oil trade, any threat to its flow quickly amplifies uncertainty in oil markets.
In that context, the latest spike is a return to the kind of elevated uncertainty that has historically preceded broader economic stress.
Our research suggests that elevated oil price uncertainty materially slows the global economy. This is in addition to the negative effects from higher oil prices. World industrial production drops by roughly 0.35 percentage points with a 90-point spike in the OPU index. With today’s uncertainty levels crossing 700, it’s clear that the current uncertainty will have sizable effects on global economic activity.
This is because heightened uncertainty makes it more sensible to wait and see how things unfold, so households delay purchases and major investments as they brace for potential income and cost shocks. When businesses cannot reasonably predict where energy prices are heading, they delay major investments, which slows capital formation, disrupts production planning and weakens productivity growth.
Historical episodes of high oil price uncertainty have often been accompanied by rising global risk aversion. This can make it harder and more expensive to borrow, and can put pressure on government finances. In economies with weaker fundamentals, this can trigger capital outflows as investors get nervous, interest rates rise, and banks become more cautious about lending.
A renewed spike in oil price uncertainty now could therefore quickly magnify existing fragilities, deepen the slowdown in industrial activity, and strain economies that already have limited room for policy maneuver.
Given the sizable impact of oil price uncertainty on economic activity above and beyond the effects of higher oil prices, central banks should be alert to these risks and adjust interest rates and other tools to keep the economy from slowing substantially. Fiscal policy can also help offset the impact of the volatility in prices, rather than only reacting to changes in the average price level.
Strengthening social protection frameworks is critical to effectively shield the most vulnerable from the economic fallout of rising oil price uncertainty. Targeted cash transfers can protect vulnerable families from slipping into generational hardship during oil price swings and weaker economic activity.
Finally, reducing reliance on oil by diversifying energy sources through investment in renewables, storage capacity, and alternative fuels can also lessen economies’ susceptibility to oil price fluctuations, and strengthen resilience during periods of heightened oil price uncertainty.
Source: blogs.adb.org
