Now, with the ongoing war between Israel and Iran, tensions have sharply elevated, causing increased concern about what would happen if global energy markets were affected. Iran has publicly threatened to shut down the Strait of Hormuz. This important waterway has become the lifeblood of the world, as it carries approximately one-fifth of the globe’s oil output. This is all the more troubling considering today’s geopolitical realities and the uncertainty surrounding global economies.
Richard Bronze, head of geopolitics at Energy Aspects, described the development as “very serious and alarming.” The Strait of Hormuz is a very narrow choke point. We see it as a critical weak spot for global oil markets. The threat of closure would just further stoke what is already a very volatile situation in energy prices.
The strikes that occurred on Friday were the first to specifically attack Iranian sites. Iran’s swift and immediate retaliation sent shockwaves that rattled international financial markets. The escalating conflict has left many wondering how long it can be sustained and if other regional actors will join the fight. In addition, there has been some significant speculation about the likely role for U.S. intervention to help de-escalate rising tensions.
Mohammed El-Erian, chief economic adviser at Allianz, warned that the conflict has the potential to deliver “a bad shock for the global economy at a bad time.” He warned that the impacts of the war might produce short and long-term adverse impacts.
“Whichever way you look at it, it’s negative short-term, it’s negative longer-term.” – Mohammed El-Erian
As the war broke out, oil futures skyrocketed by 7% by Friday mid-afternoon, a nod to market fears about supply disruptions. Brent Crude, the main international benchmark, rose by more than 10% before easing to just above $75 a barrel. Even with this increase, it is still roughly 10% below its value from one year prior.
David Oxley, an economist at Capital Economics, explained what rising oil prices would mean for consumers. He stated that “a rough rule of thumb is a $10 rise in the oil price would add about 7p to the price at the pump.” Increases like this would put even more pressure on families who are already suffering economic distress during a time when the planet is experiencing extreme inflationary pressures.
Gas prices jumped, too, after the attacks late Thursday night, adding to consumer panic. While immediate impacts are apparent, experts suggest that the effects may take time to trickle down to households due to market mechanisms and regulatory frameworks.
As strains on the global economy continue to cause choppy waters, longer-term repair will require major producers like Saudi Arabia and Brazil to exercise their capacity to increase supply and stabilize prices. Experts warn that the severity of the conflict’s effects will be determined mostly by how it plays out.
As Richard Bronze pointed out, this was a very, very, very precarious time in the Middle East. He cautioned that any instability, whether intentional or not, would have dire effects.
“Instability in the Middle East is nothing new; we’ve seen numerous bouts of it.” – David Oxley
The aftermath of past conflicts, such as Russia’s invasion of Ukraine in 2022, demonstrated how geopolitical events can influence energy demand and pricing. As economies around the world reopened after COVID-19 lockdowns, energy demand increased sharply, resulting in renewed price spikes and volatility.