 "People walk next to a fragment of apparent remains of a ballistic missile which fell at an unrecognised Bedouin village, following an attack by Iran on Israel, near the southern city of Arad, Israel. Since then, oil prices have been rising. Reuters")
When Iran fired a huge barrage of ballistic missiles at Israel on Tuesday night, many were aghast and anxious over the dramatic military escalation in the region. Many also expressed concern about how it could push oil prices to a new high, disrupting global supplies.
Since then, oil prices have surged — though some experts note that it’s a marginal spike — with some anticipating that the ongoing military action could easily take the price of oil to even $100 a barrel.
In fact, on Thursday, oil prices saw a bump of almost five per cent when US President Joe Biden told reporters he was “discussing” the question of whether the US would support an Israeli attack on Iranian oil facilities.
We take a closer look at how the ongoing Iran-Israel conflict could affect oil prices and what this means to the world.
Iran’s oil production capabilities
When Iran struck Israel on Tuesday with 180 missiles , the Jewish nation said it had intercepted most of them, leading to minimal damage. However, Israeli Prime Minister Benjamin Netanyahu vowed that it would exact revenge on Tehran. He had said that Iran had made a “big mistake” and that it would “pay for it”.
While Israel hasn’t retaliated yet, some reports suggest that the Jewish nation is looking to strike Iran’s oil terminals and refineries or even nuclear sites . “There are so many things they can hit, and they’re going to be able to hit all those with great effectiveness. Iran’s not going to be able to stop them,” said a former senior US military officer with experience in the region.
This could spell trouble for oil prices. Why?
Because Iran is a major player in the global market for crude oil. Latest data from the US Energy Information Administration lists Iran as the ninth largest oil producer, accounting for about four per cent of world oil production last year. A bulk of its oil goes to China.
As per analysts at the ClearView Energy consulting agency, destroying Iran’s oil output would cause international crude prices to rise to as high as $86 per barrel, a level last seen in June. However, Bjarne Schieldrop, chief commodities analyst at SEB, notes that a major escalation could easily take the oil price to $100.
Oil climbs upwards
Interestingly, oil prices have already started seeing an upward trend. Before the missile attack on Tuesday (October 1), oil was trading at just above $71 a barrel. However, Brent crude, the international benchmark, rose to nearly $76 a barrel on Wednesday.
And on Thursday (October 3), Brent, the global benchmark for crude, closed at $77.62 — a rise of 5.02 per cent. This spike came particularly after reporters asked US President Joe Biden if America was in talks with Israel about a potential strike on oil facilities in Iran.
In response, Biden had said, “We’re discussing that,” adding, “There is nothing going to happen today.”
Notably, oil prices hit a high during the Biden administration near $124 a barrel in March 2022, shortly after Russia invaded Ukraine. That rise still serves as a major talking point for Donald Trump in his effort to defeat Vice President Kamala Harris in the upcoming presidential elections.
Shutting down Strait of Hormuz
And while the oil price rise has been marginal, oil watchers and experts note that this would skyrocket if Tehran chose to shut the Strait of Hormuz at the mouth of the Persian Gulf. ClearView believes if Tehran did choose to respond to Israel’s actions by closing down the Strait of Hormuz oil prices would increase to as high as $101 a barrel.
This is because the Strait of Hormuz is known as the world’s most important artery — a fifth of the world’s total oil passes through this passage on a daily basis. Data from analytics firm Vortexa shows that an average of 20.5 million barrels per day (bpd) of crude oil passed through Hormuz in January-September 2023.
Other analysts also concur that even a threat to shut the strait — 21 miles across at its slimmest point — would have a major impact on oil prices. For instance, Citigroup wrote on Wednesday, “Any closure of the Strait of Hormuz would represent a tipping point for the global oil market and the world economy.”
“In a such a scenario, global oil markets would be in unchartered waters, with oil prices likely experiencing a sharp and significant spike well past previous record highs,” Citigroup added.
Benjamin Shoesmith, senior economist, KPMG Economics, was of the same opinion. He wrote, as per a Business Standard report, “Threats to transport via the Strait of Hormuz represent a much larger potential shock to global oil supplies than Russia’s invasion of Ukraine.”
Bjarne Schieldrop, chief commodities analyst at SEB, was also quoted by T_he Telegraph_ as saying, “If all of Iran’s export capacity was damaged and they couldn’t export, why would they stand back from blocking the Strait of Hormuz, why should everyone else have oil income? That would be a worst-case scenario, but then the oil price would go ballistic.”
Impact of rise in oil prices
If oil prices do climb upwards, it would be catastrophic for the world. It would be especially telling in the United States, which is going to the polls on November 5. If oil prices surge, the price of gas will also rise. For instance, a 10 per cent jump in oil prices is a 10 per cent jump in gasoline prices.
Republicans would use this as evidence that the Democrats cannot be trusted on the economy or foreign policy.
Similarly, in the UK, a price hike in oil would be problematic for the United Kingdom. India , which is highly dependent on oil from West Asia, would also be significantly affected. The spike in oil prices would drive up the cost of petrol and diesel, which in turn will have a domino effect on everyday products and businesses.
And it’s the same for the world across. As the BBC notes, a jump in oil prices now would be a huge blow to world bankers as they have just started seeing signs of economies emerging from the three-year inflation shock from the COVID pandemic and Ukraine war.
With inputs from agencies