Israel's recent strikes on Iran and the subsequent response have caused a ripple effect in global financial markets, particularly in the oil sector. The price of oil surged by 7% on Friday afternoon, sparking concerns about potential spikes in energy prices that could impact various sectors including petrol, food, and travel. This scenario is reminiscent of the aftermath of Russia's invasion of Ukraine three years ago, which had a global impact.

Oil Price Surge

Following the attacks, Brent Crude, the main international benchmark, saw a more than 10% increase before settling at around $75 per barrel. While fluctuations in oil prices are common in response to geopolitical events and global economic conditions, the current Brent crude price remains approximately 10% lower than the previous year. It is also significantly below the peaks observed in 2022 during Russia's invasion of Ukraine.

Impact on Prices

When wholesale oil prices rise, the effects are felt across various sectors. Higher energy costs can lead to increased petrol prices, affecting transportation, farming, and manufacturing. This, in turn, can result in higher prices for food products due to elevated production and transportation expenses. However, the extent of these price hikes depends on the duration of high energy costs. While rising crude prices may impact petrol prices, the overall effect is limited.

Additionally, the recent surge in gas prices following the attacks may have a gradual impact on households, considering market dynamics and regulatory factors that influence price capping.

Potential for Further Increases

Experts suggest that the ongoing conflict between Israel and Iran poses significant concerns, but the overall impact may not be as severe as previous geopolitical events. Factors such as the duration of the conflict, involvement of other regional countries, and potential intervention by the US will influence the outcome. The threat of disruption to shipping in the Strait of Hormuz, a crucial route for global oil transportation, remains a key concern. While the likelihood of such an event is low, Iran's past threats and the current situation have slightly increased the probability. However, without significant disruptions, oil prices are unlikely to remain elevated.

In contrast to the energy demand surge seen in 2022 post the Covid pandemic, the current global economy is facing challenges. Major oil-producing countries have the capacity to increase supply, which could help stabilize prices amid the ongoing conflict.

Global Economic Implications

The impact of the Israel-Iran conflict on energy prices extends beyond the oil sector. Higher energy costs can have widespread effects on inflation, consumer spending, and overall economic stability. The outcome will largely depend on the resolution of the conflict, involvement of key players, and potential disruptions to oil transportation routes.

Source: BBC