IMF Warns of $125 Oil If Middle East War Drags Into 2027

The International Monetary Fund has issued a stark warning that a prolonged conflict in the Middle East could push crude oil prices to $125 per barrel and derail the global fight against inflation. The fund’s adverse scenario, previously a remote risk, is now unfolding and threatens to reverse hard-won economic stability across developed and emerging markets alike.

"Inflation was already picking up and the global economy could face a 'much worse outcome' if the war in the Middle East drags into 2027 and oil prices hit around $125 per barrel," Kristalina Georgieva, Managing Director of the IMF, said Monday at a conference hosted by the Milken Institute.

The continuation of the war means the lender’s baseline scenario, which called for a minor slowdown of global growth, is no longer possible, Georgieva said. While long-term inflation expectations remain anchored for now, that could change if the conflict and its associated energy price shocks persist, potentially forcing a tightening of financial conditions just as many economies were beginning to recover.

The warning highlights the acute vulnerability of the global economy to geopolitical shocks transmitted through energy markets. A sustained period of oil prices above $100 would not only fuel headline inflation directly through higher energy costs but would also feed into core prices by increasing costs for transportation, manufacturing, and services, squeezing household purchasing power.

A Shock to a Recovering System

The IMF's warning is not an abstract threat. For import-dependent emerging markets, the impact is immediate. Take Ghana, a country that recently fought its way back from a severe economic crisis. After seeing its inflation rate peak at a 21-year high of 54.1% in 2022 following the last global energy shock, a painful adjustment period brought the rate down to a 27-year low of 3.3% by February 2026. A sustained oil shock now threatens to undo that progress.

Ghana’s situation illustrates the transmission mechanism perfectly. The country is a crude oil producer but imports nearly 97 percent of its refined fuels. A surge in Brent crude to near $120 per barrel directly pressures its trade balance and the cedi, its currency. This dynamic could force the Bank of Ghana to pause or reverse recent interest rate cuts, stifling a nascent economic recovery.

The Strait of Hormuz Chokepoint

The primary risk stems from the potential closure of the Strait of Hormuz, a narrow waterway through which roughly 20 percent of the world's daily oil supply passes. Unlike sanctions-driven disruptions, which can be rerouted, a physical closure of the strait represents an immediate and severe supply shock. The International Energy Agency has called such a scenario "the largest supply disruption in the history of the global oil market."

This physical chokepoint means that oil flows cannot simply be redirected, creating a scenario of physical shortages that would ripple through global supply chains. "Physical shortages in oil supply would begin appearing around the world because of the closure of the Strait of Hormuz," Chevron Chairman and CEO Mike Wirth said Monday, underscoring the severity of the logistical challenge.

Limited Buffers and Difficult Choices

For many nations, the policy choices are grim. Governments that have recently undergone painful fiscal consolidation, such as removing fuel subsidies, will face intense political pressure to reverse course. Ghana, for instance, removed fuel subsidies for the first time in 30 years as a key part of its $3 billion IMF program. Reinstating them would threaten its hard-won fiscal stability.

While some commodity exporters may benefit from a partial hedge—Ghana, for example, is Africa's largest gold producer and could see revenues rise from a flight to safety—these buffers are finite. A prolonged conflict lasting more than a few months could drain foreign exchange reserves, weaken currencies, and put IMF program targets at risk across multiple countries. The fund’s warning is a clear signal to policymakers that the brief period of post-pandemic stability may be coming to an end.

This article is for informational purposes only and does not constitute investment advice.