Oil price shocks ripple across economies differently. Watch how stagflation and deflation play out, how importer and exporter currencies diverge, and the bind it puts central banks in.
Oil price declines are welcomed but signal weak demand. Pass-through slower. Deflation risk if broad-based.
Oil importers like US/EU face dual pressure: inflation (bad for carry) + demand destruction (good for safety). Net effect: slight weakness on oil up, strength on oil down.
Oil exporters like Canada, Russia, Saudi Arabia see direct benefit from oil rally (currency boost, fiscal relief). Collapse on oil down (current account stress).
CB faces impossible choice: Tighten to fight inflation (crushes growth further) or Ease despite inflation (validates price pressures). Historical: 1970s tighten to control inflation. 2022 tighten despite recession fears. Real economy loses either way.
CB generally cuts (fights deflationary impulse). But if demand destruction is severe, rate cuts may not matter (liquidity trap). Currency depreciation becomes transmission mechanism.