Tensions between Israel and Iran recently sent ripples through global financial markets, initially prompting a surge in oil prices. The episode, which involved the exchange of missile and drone strikes between the two nations, had investors bracing for prolonged disruption in energy supplies. However, after the weekend of hostilities, the oil market has somewhat calmed, with crude prices retreating from their peak, although they remain significantly higher than they were a month ago.
Currently, oil is trading at around $74.50 per barrel, down from a high of over $78 recorded last Friday, yet still $10 more than it was four weeks ago. Brent Crude, the primary international oil benchmark, responded almost instantly to the conflict. This pattern of fluctuation is not uncommon; oil prices typically react to geopolitical instability and economic uncertainties.
Despite the recent increase, prices are far below the levels seen a year ago and considerably lower than the 2022 spike following Russia’s invasion of Ukraine, when oil nearly touched $130 a barrel. That earlier surge had far-reaching consequences, causing price hikes in everything from fuel to food across the globe.
The big question now is whether this recent rise in oil prices will translate into higher costs for consumers worldwide. Historically, increases in wholesale oil prices have led to higher petrol prices at the pump, something that directly impacts millions. However, the ripple effects extend beyond petrol. Rising energy costs often trickle into the prices of consumer goods, manufacturing, and farming activities.
Energy is a vital input in the agricultural sector, impacting the cost of running farm machinery, processing food, and transporting goods. “A rough rule of thumb is a $10 rise in the oil price would add about 7p to the price at the pump,” explained David Oxley from Capital Economics. He emphasized that while oil is central to the story, it’s not the only concern.
Gas prices also play a critical role, particularly in countries like the UK where many homes are heated using gas and electricity rates are influenced by gas costs. According to Mr. Oxley, gas prices too have climbed following last week’s attacks, although the effect on household bills may take time to materialize due to how pricing and regulations function in that market.
This situation has revived concerns reminiscent of the energy crisis that followed the Ukraine war. Then, a sharp rise in gas prices contributed heavily to global inflation, further squeezing household budgets. Whether a similar chain of events occurs now depends largely on how the Israel-Iran conflict unfolds in the coming weeks.
Richard Bronze, head of geopolitics at Energy Aspects, described the present state of affairs as “very significant and concerning.” Nonetheless, he cautioned that it might not reach the level of impact seen during the Ukraine conflict or past crises in the Middle East.
The key uncertainties revolve around how long the hostilities between Israel and Iran continue, whether neighboring countries become entangled, and what role the United States might play in mitigating tensions. Most crucially, markets are closely watching the Strait of Hormuz — a narrow maritime passage off Iran’s southern coast through which about 20 percent of the world’s oil supply is transported. “It’s a narrow choke point so it is a significant weak spot for global oil markets,” noted Mr. Bronze.
Although direct disruption in the Strait of Hormuz remains unlikely, Iran has previously made threats involving the route, and the current scenario has marginally raised the likelihood of such a move. Even the mere possibility of this kind of interference is contributing to upward pressure on oil prices, according to Mr. Bronze.
Still, analysts argue that absent actual shipping disruptions, prices are unlikely to remain elevated. Unlike in 2022, when demand surged as the world economy reopened post-Covid, today’s global economic conditions are more subdued. Additionally, countries like Saudi Arabia and Brazil have spare production capacity, which could be utilized to increase supply and bring prices down.
Looking at the broader picture, the potential economic consequences depend largely on how the conflict evolves. Should it escalate significantly, the world could face another energy-related shock. “It does have the potential to be a bad shock for the global economy at a bad time,” warned Mohammed El-Erian, chief economic adviser at Allianz.
“Whichever way you look at it, it’s negative short-term, it’s negative longer-term,” Mr. El-Erian added. “It’s another shock to the stability of the US-led global economic order at a time when there were already a lot of questions.”
If oil prices were to surge past $100 a barrel again, Capital Economics estimates this could push inflation in advanced economies up by as much as 1%. That would complicate efforts by central banks to lower interest rates, potentially prolonging the high-rate environment and making borrowing more expensive for consumers and businesses.
However, David Oxley believes that such an extreme scenario remains unlikely. “Instability in the Middle East is nothing new, we’ve seen numerous bouts of it,” he said. “In a week’s time it might have all blown over.”
Overall, while the markets have been quick to react to the Israel-Iran tensions, the long-term impact will depend on a complex mix of geopolitical developments, oil supply dynamics, and the resilience of global economic systems. For now, consumers and businesses alike are bracing for the possibility of higher costs but hoping for a swift de-escalation that could stabilize energy markets once again.