According to an analysis published by The Guardian, oil prices have exceeded $100 per barrel due to the U.S.–Israel conflict with Iran, raising concerns about the consequences for the global economy and a potential rise in inflation.
Economists warn that a prolonged conflict in this key energy-exporting region could seriously affect living standards worldwide.
How High Could Oil Prices Go?
On Monday, oil prices reached $119 per barrel, the highest level since Russian invasion of Ukraine in February 2022. Analysts warn that the continued closure of the Strait of Hormuz could push prices close to $150 per barrel, surpassing the 2008 record of $145.29.
This narrow waterway transports about one-fifth of the world’s oil and liquefied gas and one-third of the most widely used fertilizers globally. Goldman Sachs states that an effective blockade by Iran would have an impact 17 times greater than the maximum disruption of Russian oil production in April 2022.
Analysts emphasize that how high prices rise will depend on how long the blockade lasts and whether exports can be redirected. Saudi Arabia has begun redirecting oil to ports on the Red Sea, but most exporters remain blocked.
Oil storage facilities in the Persian Gulf are filling up, raising the risk of shutting down major oil fields and prolonging the energy crisis.
Consequences for Inflation
The rise in oil prices comes at a sensitive moment for the global economy. Central banks were nearing the end of their interest-rate normalization after the most aggressive tightening cycle in recent years, but the conflict with Iran could force them to raise borrowing rates again.
Higher energy costs will affect consumer prices, household energy bills, and business costs, which will spread through global supply chains. However, experts hope the world can avoid the extreme inflation seen in the 1970s energy crises.
According to Jim Reid of Deutsche Bank:
“The global economy is less sensitive to energy shocks than it was 50 years ago. Economies are less energy-intensive and labor markets are more flexible.”
Risk of a Global RecessionThe surge in inflation following the COVID-19 pandemic and the Russian invasion of Ukraine has already stretched families and businesses to their limits. Another wave of inflation could reduce consumer demand and economic activity, increasing the risk of stagflation rising prices without economic growth.Ian Stewart, chief economist at Deloitte in the UK, warns:“High oil and gas prices are usually signs of economic trouble. Historically, energy price spikes have triggered recessions in Western economies.”How Might Governments Respond?
The G7 countries have stated they are ready to release emergency oil reserves to ease supply concerns. The United States and China have already increased their reserves, while European countries which rely more heavily on energy imports are expected to feel the crisis more strongly.
Governments will be under pressure to improve energy security, accelerate the transition to low-carbon economies, and increase investment in renewable energy.
Much of the focus will also be on emergency financial support for households and businesses facing high energy bills, although high public debt levels may limit governments’ ability to finance new support programs.Experts warn:“This may be the biggest energy supply and logistics crisis in modern history,” concludes the analysis by The Guardian.
