Smoke and Mirrors over Hormuz — Energy Edition: The World in the Eye of the Oil Price Storm

Second, strong validation of new energy pathways. Lin Boqiang, Dean of the China Institute for Energy Policy at Xiamen University, points out that the Hormuz crisis affirms the correctness of China’s vigorous development of wind power, photovoltaics, energy storage, and electric vehicles as an alternative energy pathway. For decades, the industry had taken for granted that the Strait of Hormuz would remain open—but this crisis will significantly accelerate countries’ strategic shift toward ‘energy localization.’ It is foreseeable that China’s energy storage industry will experience explosive growth during the 15th Five-Year Plan period. Third, strategic moves anchored in technological breakthroughs. At the end of February 2026—just as oil prices surged past $100 per barrel—BYD unveiled its second-generation blade battery and flash-charging technology, enabling charging from 10% to 70% in just five minutes under normal temperatures—truly achieving parity with refueling speed. Only when EVs can operate seamlessly across extreme climates—from Mohe in northern Heilongjiang to Sanya in southern Hainan—can they meaningfully replace hundreds of millions of tons of imported crude oil annually. Lin Boqiang forecasts that once solid-state battery technology matures, China’s NEV penetration rate could reach 80–90%. Fourth, diversification of import sources and deep-sea development. China’s crude oil import sources have already diversified, with no single country accounting for more than 20% of total imports. Simultaneously, China has established a combined land-and-sea energy transportation system, including overland pipelines such as those from Russia, Central Asia, and the China–Myanmar corridor. --- V. Europe’s Stagflation Quagmire and Global Central Banks’ Dilemma Europe faces the most difficult situation. Having lost access to Russia’s cheap energy, Europe has become highly sensitive to global energy price fluctuations—and the Hormuz crisis has plunged it into a classic ‘stagflation’ trap. According to a recent report by Berenberg Bank, if the conflict persists, the eurozone will suffer a dual blow: GDP growth will be halved while inflation rebounds. Full-year 2026 GDP growth is projected to plummet to 0.7%, far below the European Central Bank’s (ECB) forecast of 1.2%; meanwhile, annual inflation is expected to rebound to 3.1%, markedly exceeding the 2% target. ECB Chief Economist Philip Lane further warned that if one-third of oil and gas shipments through the Strait of Hormuz are disrupted, eurozone inflation would rise by over 0.8 percentage points and growth would slow by 0.6 percentage points. The root cause lies in Europe’s energy dependence. When energy prices rise, Europe’s trade balance deteriorates—and its currency often reflects this pain: the euro has already weakened significantly against the U.S. dollar. More alarmingly, market expectations for the ECB have dramatically reversed—from pre-war consensus on ‘holding rates steady’ to speculation about ‘another potential rate hike,’ marking the most abrupt policy pivot since 2022. Global central banks broadly face the same dilemma. The International Energy Agency (IEA) has sharply downgraded its 2026 global oil supply growth forecast to 1.1 million barrels per day—and warned that March supply could plunge by 8 million barrels per day. IMF Managing Director Kristalina Georgieva noted that a sustained 10% rise in oil prices over one year would lift global inflation by 40 basis points. Faced with this stagflationary supply shock, central banks worldwide must painfully weigh ‘tightening that exacerbates slowdown’ against ‘easing that fuels inflation’—a choice with no textbook answer. --- VI. Structural Shifts in the Eye of the Storm If oil prices remain above $120 per barrel long-term, the world will confront three profound transformations. First, a reshaping of the inflation landscape.

Rate Hikes, Rate Hikes, Rate Hikes… Each Central Bank Has Its Own ‘Pain’

Regarding the Federal Reserve’s future monetary policy path, most observers lean toward a hawkish stance. Liu Ying believes that the September rate hike—which passed unanimously—combined with supportive inflation data, makes another Fed hike before year-end highly probable, potentially pushing the federal funds rate into the 4.00%–4.25% range; rates would then remain elevated for some time into next year. Wu Zewei similarly judges that markets widely expect one more hike before year-end, with the terminal rate rising modestly further. Given the U.S. economy’s robust resilience and persistent inflation, conditions for pivoting to rate cuts remain absent in the near term; should price declines fall short of expectations or core inflation remain stubbornly high, the pace of tightening may stay relatively firm. International institutions also project a hawkish outlook. The International Monetary Fund notes that, owing to rising energy prices and their pass-through to core inflation, the Fed has virtually no room to cut rates in 2026; monetary easing would only become feasible after a marked deterioration in labor market conditions and a clear retreat in inflationary pressures. ING Bank updated its forecast following the September FOMC meeting, predicting a possible 25-basis-point hike by the Fed in December. This Fed rate hike is also interpreted externally as a signal that major central banks globally are again tightening monetary policy. U.S. interest rate adjustments transmit outward via multiple channels—including trade, capital flows, and exchange rates. Liu Ying emphasizes that, so long as inflation stickiness has not genuinely subsided, the Fed’s policy stance will remain anchored in tightening. European Central Bank: The Agony of Stagflation On September 10, the European Central Bank announced a rate hike, raising all three key eurozone interest rates by 25 basis points. Following this move, the deposit facility rate, main refinancing rate, and marginal lending facility rate stood at 2.50%, 2.65%, and 2.90%, respectively. Amid persistently high energy prices and weakening economic momentum, the ECB’s step forward was cautious—and conflicted. In its monetary policy statement released that day, the ECB stated that ongoing Middle East conflict continues to exert upward pressure on inflation, with surging energy prices serving as the primary driver of overall price increases. This rate hike aims to ensure the eurozone’s medium-term inflation rate stabilizes at its target level. The ECB’s September forecast projects eurozone inflation at 3.0% for 2026, and at 2.5% and 2.1% for 2027 and 2028, respectively. Liu Ying, researcher at the Chongyang Institute for Financial Studies at Renmin University of China, told the International Business News that the eurozone’s August CPI had risen above 3%, hitting a three-year high. Energy was the largest contributor to the overall CPI increase—and thus the main engine of inflation. ECB Chief Economist Philip Lane likewise issued a warning: ‘We are witnessing a second round of energy price hikes.’ Beyond this oil price surge, natural gas prices are rising in tandem—pushing inflation higher and prolonging its persistence, with a return to the ECB’s target not expected until mid-2027. He cautioned that if the energy shock intensifies further this autumn—or lasts longer—the pressure on the European economy will mount accordingly. Beyond imported inflation, external interest-rate differentials pose additional strain. Liu Ying points out that Fed rate-hike expectations have lifted U.S. dollar interest rates, triggering capital repatriation. Should the ECB refrain from following suit, widening interest-rate differentials could accelerate capital flight and destabilize financial markets. Yet the eurozone’s own recovery remains fragile.

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