Oil and Commodity Shocks
Energy is an input to nearly everything, which makes a large oil move a shock that propagates through inflation, consumption and policy at once.
MadStockAlerts Research · Updated August 28, 2026
What to take away
- Energy affects both the price level and real consumer spending simultaneously.
- Supply-driven and demand-driven moves have opposite implications.
- Central banks usually look through energy moves unless expectations shift.
- The US is now a large producer, which has changed the domestic impact.
- The same price move means opposite things depending on what caused it.
MAD Academy Training Video · 0:45
The Inflation Policy Cannot Fix
A supply shock raises prices and lowers output at the same time, which is the one combination interest rates cannot solve.
This lesson is part of a Stock Alerts + Tools plan.
Why energy is different
Oil is an input to transport, agriculture, chemicals, plastics and heating. A sustained rise raises costs across most of the economy and simultaneously reduces the money households have for everything else, so it is inflationary and contractionary at the same time.
This combination is what makes an energy shock so awkward for policy. Tightening to address the inflation deepens the demand hit; easing to support demand risks entrenching the inflation. There is no comfortable response.
Supply against demand
| Cause | What it implies |
|---|---|
| Supply disruption | Higher prices with weaker growth; the classic adverse shock |
| Producer discipline | Higher prices, gradual, more easily absorbed |
| Strong global demand | Higher prices as a symptom of growth rather than a threat to it |
| Falling demand | Lower prices signalling a slowdown, not a windfall |
The same price move means opposite things depending on which of these produced it, which is why the cause is the first thing to establish. Cheaper oil is good news when supply expanded and bad news when demand collapsed.
The futures curve helps distinguish them. Backwardation, where nearby contracts cost more than distant ones, points to physical tightness now; contango points to ample near-term supply.
Looking through it
Central banks generally do not respond to energy moves directly, because they are volatile and largely outside policy's influence. This is exactly why core measures exclude energy.
The exception is when a sustained move begins to shift longer-run inflation expectations, at which point it stops being transitory in the relevant sense. Expectations, unlike the oil price itself, are something policy can act on.
Scroll the chart sideways to see all of it.
- Headline
- Core
The US position has changed
The United States is now a major producer as well as a major consumer, which has substantially reduced the net drag from a higher oil price at the national level.
The distributional effect remains: it is a transfer from consumers to producers rather than a straightforward loss, and the equity market reflects that by rewarding one sector while the rest of the index absorbs the cost.
Which oil price, and what the curve says
Two benchmarks are quoted. West Texas Intermediate is priced at Cushing, Oklahoma and is the US reference; Brent is a North Sea blend and is the international one. The spread between them reflects transport and export constraints rather than any difference in the underlying commodity, and it has been both positive and negative.
Neither quoted price is the price of a barrel of oil today. Both are futures contracts for delivery in a specific month, which is why an oil price can be reported as negative, as the expiring May 2020 WTI contract was, without any barrel being given away. Holders of an expiring contract faced physical delivery into storage that was full, and paying to avoid it was cheaper than taking it.
The shape of the futures curve carries information the spot price does not. A curve sloping upward implies ample current supply relative to demand; one sloping downward implies the opposite, and the slope changes before the headline price does.
Second-round effects, and why central banks watch them
An energy price rise raises headline inflation directly and mechanically, and that first-round effect fades from the annual comparison twelve months later whether or not the price falls back. A committee that responded to it would be tightening into an effect that is already reversing.
The concern is the second round: energy is an input to nearly everything, so a sustained rise feeds into freight, into manufacturing, into food, and eventually into wage demands as households seek to recover lost purchasing power. Once that has happened, the inflation is no longer about energy and does not fade on its own.
- Core inflation is watched specifically to see whether the first round has become the second.
- Inflation expectations, from surveys and from the spread between nominal and inflation-linked bonds, are watched for the same reason.
- Wage growth is the clearest evidence that a shock has propagated, and it is the slowest to appear.
- A shock that fades leaves core untouched. One that propagates shows up there within a few quarters.
This is the substance behind the phrase looking through a supply shock. It is not an instruction to ignore energy prices; it is a decision to respond to the second round if it appears and not to the first, and the evidence for which is happening arrives in the core and expectations series rather than at the pump.