Potential Effects of the Israel-Iran Conflict on Energy Costs

The cost of crude has decreased following a weekend of drone and missile strikes between the two nations, which caused the price of oil in particular to spike.

However, there are new concerns that rising energy prices could make everything more expensive globally, including in the UK, from food and petrol to vacations. Oil prices have also risen by $10 over the past month.

That is what transpired following Russia's invasion of Ukraine three years ago, which had an impact on people's lives everywhere.

What is the Increase in Oil Prices?

The markets responded immediately to the attacks.

The primary global benchmark, Brent Crude, increased to more than $78 per barrel on Friday. Although it has since dropped back to roughly $74.50, it is still $10 more than it was at this time last month.

Oil prices fluctuate due to geopolitical events and global economic conditions, such as the Israel-Iran conflict. However, they are significantly lower than a year ago and the peak prices seen in 2022 following Russia's invasion of Ukraine, when they reached nearly $130 a barrel.

Will fuel and other prices rise?

Increased wholesale oil prices lead to higher petrol prices, affecting people first, but also impacting farming and manufacturing, as more expensive energy leads to higher prices.

Moreover, higher energy costs can increase food prices by increasing costs for farm machinery, transport, and processing. However, this effect will only occur if energy prices remain high for a sustained period, while rising crude prices have a limited impact.

Notably, David Oxley at Capital Economics suggests that a $10 increase in oil prices would add about 7p to the pump price, but cautions that this is not just an oil story; the shock to prices following the Ukraine conflict was largely due to higher gas prices.

Likewise, Richard Bronze, head of geopolitics at Energy Aspects, identifies the current conflict between Israel and Iran as significant and concerning. However, the impact may not be as significant as the Ukraine conflict or previous Middle East troubles. The main questions are whether the US intervenes.

Since the Strait of Hormuz is a narrow choke point and a major weak spot for the world's oil markets, any disruption could affect this vital oil production route.

The Impact on the World Economy

Oil prices are unlikely to remain high without disruption to shipping. Oil producers from Saudi Arabia and Brazil have the capacity to increase oil supply, potentially lowering prices, as the global economy faces tougher times.

Energy price rises could have a negative impact on the global economy, according to Allianz's chief economic adviser, Mohammed El-Erian. The scale of the rise depends on the future of the conflict between Israel and Iran. El-Erian warns that such a shock could be short-term and long-term negative, affecting the stability of the US-led global economic order.

In closing, Capital Economics predicts that if oil prices return to over $100 a barrel, it could increase inflation in advanced economies by 1%, challenging central banks to lower interest rates. However, David Oxley suggests that Middle East instability is not new and could dissipate within a week.

Read more news:

Elon Musk claims that a "massive cyberattack" caused waves of outages on his X

TikTok 'Craze' Caused Peak District's Severe Parking Situation

Microsoft will shut down Skype in May after nearly two decades