Rising oil prices continue to weigh on the world economy as a result of the war with Iran. Now, some analysts say it could be worst as the conflict continues.
The concern is that apart from the effects of rising oil prices, the disruption of the war may come in waves – it will play out for weeks and months and leave several sectors of the world economy untouched.
“We haven’t seen the current crisis,” said Samantha Gross, director of energy security and climate at the Brookings Institution. I feel the markets are underestimating the impact of the war so far.
The warning signs are already there. The global oil price index, Brent crude – which mainly influences US oil prices – briefly rose to $119 a barrel last week, the highest level since the start of the war and the last level seen in July 2022 amid the wave of the epidemic season. As of Monday, Brent prices were sitting at $113 a barrel.
Yet even those new conditions could quickly fade if the conflict in the Middle East remains unresolved, analysts say. In other words, current prices still do not reflect the extent of the deficits resulting from long-term conflicts.
“It is clear to me that if this crisis lasts more than three or four months, it becomes a problem of the global system,” Patrick Pouyanné, CEO of the oil company Total, said at the world energy conference in Houston earlier this month, according to Bloomberg News.
The most visible area of oil supply from the Gulf continues to be the Strait of Hormuz, through which 20% of the world’s oil and natural gas was transferred before 28 February. more than five ships, according to data from the International Monetary Fund.
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That has left millions of barrels of oil, along with other valuable commodities, locked up and unable to reach world markets. As global businesses begin to run out of supplies, the cost of finding replacements can rise.
Even beyond the Strait of Hormuz, key oil production facilities, including liquefied natural gas (LNG), a vital energy source, have been hit by tit-for-tat strikes across the Middle East.
The longer it waits, and until those utilities come back online, the world will face energy shortages that will have a negative impact on the American economy.
The impact on US drivers is already huge. The average price of gasoline rose to $ 3.99 per gallon on Sunday, their highest level since the summer of 2022. Patrick De Haan, the chief expert of Gas Buddy, estimates that, at some point this week, motorists will have spent an additional $ 10 billion on gas compared to pre-war levels. That translates to a reduction of about $35 per month in disposable income.
And that’s the only direct result from high prices at the pump for regular drivers. Higher oil prices also translate into higher overall costs for the economy, as transportation costs, as well as raw materials and packaging costs, rise. Diesel prices now sit below the record price seen in June 2022.
“Rising oil prices will raise costs, transport and production costs at a time when demand is still weak,” Moody’s credit rating agency analysts said in a note published last week.
The US is not directly affected by the increase in global natural gas prices due to its abundant domestic resources, especially shale. In general, the American economy has been held back from the current discovery compared to previous similar events in terms of its domestic energy production capacity, some analysts said. Also, oil dependence is generally lower than in the 1970s due to the strong activity and heavy reliance of the economy on services.
“At this stage, the correct background to the possible effects of oil price movements on the US economy is a growth scare rather than an imminent recession,” analysts at the consulting firm S&P Global said in a note published last week.
However, the American economy would not be fully caught up in the global recession caused by slow consumption and investment in other parts of the world, caused by high energy prices there.
“The current macro environment is a toxic version of the same weakness that plagued the global economy before the last recession,” BCA Research global strategist Peter Berezin said in a note published overnight on Sunday.
Many analysts now say that, due to rising oil prices, the annual US inflation rate will be around 3% compared to the Federal Reserve’s target of 2%. The new number would translate to an additional $150 per month, or $1,800 per year, for a household with $5,000 in monthly expenses.
President Donald Trump has continued to try to assure the markets that the situation is under control – although every day that passes, investors still have doubts about his ability to manage the price of the jaw. However, he continues to send different signals about US intentions: On Sunday evening, he said he believed that an agreement would be reached – only to post on social media on Monday that Iran’s oil facilities would be destroyed if an agreement was not reached. Nor has he predicted any military options that could ultimately destabilize markets, including using American ground forces to seize Iran’s oil facilities or directly control the Strait of Hormuz.
Analysts are already considering a scenario in which the world price of oil reaches $200 a barrel in the short term if Iran’s exports are damaged by the US escalation, according to Reuters.
In addition to this worsening situation, there has been an unexpected damage to the world’s energy supply that has already begun to be felt, analysts say. Without a reform of the supply chain that includes the ability of the US to directly control the flow of oil in the region, the price of oil is likely to increase indefinitely.
“Even if the conflict ends tomorrow, the supply disruption will last for a long time, because of the damage we have seen to the power infrastructure that needs to be repaired,” said Andy Lipow, president of consultancy Lipow Oil Associates. And once critical production facilities affected by the conflict come back online – something that could take months – “there will be an increased environmental risk of doing business in the Middle East, as there is no guarantee that this will not happen again,” he said.
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