As the conflict in the Middle East spreads, rising oil prices are being closely watched.
The cost of oil affects everything from the price of food at the grocery store to how much it costs to fill up your car.
Crude oil prices have risen nearly 10% this week to around $78 a barrel as the conflict has intensified.
That may seem like a big jump, but the price of crude oil tends to be volatile, and in the wake of Russia’s invasion of Ukraine, a barrel of Brent crude oil was trading at almost $130.
The rebound comes as many countries, including Britain, are just beginning to recover from the sharp rise in oil prices following the Covid pandemic and Russia’s war in Ukraine. So how concerned should we be?
Crude oil is a key ingredient in gasoline and diesel, meaning higher oil prices could push up prices at the pump just as they are near their lowest levels in three years.
If a company that supplies goods, such as food, is hit by higher fuel costs, it is likely that it will also increase its prices. These higher costs can then be passed on by supermarkets who sell the food to us, the consumers. The cost of living is going up.
“Everything we buy in store has been transported around and is made from things that have been transported around. The increase in fuel costs tends to ripple through everything,” Callum Macpherson, head of commodities at Investec, told the BBC.
Andrew Bailey, governor of the Bank of England, which sets interest rates, has warned that the conflict in the Middle East has the potential to have a “very serious” impact on Britain.
Bailey said he was watching developments “very closely.” This comes as he indicated that interest rates are heading down, and that the UK’s inflation outlook – which has fallen after being boosted by high oil and gas prices in 2022 – is looking brighter.
Still, a rise to around $78 a barrel so far is not the time to raise alarm bells.
Unless the “worst-case scenario” of further escalation occurs, oil prices are likely to “fall back quite quickly,” said Caroline Bain, chief commodity economist at Capital Economics.
Iran is the world’s seventh-largest oil exporter, with half of its exports going to China. If supplies were to be disrupted, China could turn to Russia.
But Ms Bain warns that markets are “balanced” and if the conflict escalates, “taking out a mid-tier supplier like Iran would lead to a price spike.”
She says there is “more than enough capacity” globally to fill the gap if Iranian production is lost, but the question is where Saudi Arabia’s “loyalty” will lie as the world’s second-largest oil producer and whether it will further increase or limit oil production. production.
Mr Macpherson says that if Israel decides to attack Iran’s oil sector, a rise in the price of Brent oil could increase the cost of refueling at the pumps “quite quickly”.
He explains that this scenario could pose a threat to overall inflation in Britain, which could in turn influence any decision by the Bank of England to cut interest rates.
However, he also points out that ultimately there will be no disruption to supply at all.
The direct impact of Iranian oil production is not the only concern.
The risk is that any escalation in the region could block the Strait of Hormuz, a relatively narrow channel through which a huge amount of oil tanker traffic passes – about a third of the total oil traded by sea.
It is also the route through which a fifth of liquefied natural gas (LNG) is transported, a commodity on which the world has become more dependent since sanctions were imposed on Russia following the invasion of Ukraine.
Asia is the most physically dependent on the flow of oil and gas from the Persian Gulf, and the immediate impact of an escalation would be significant.
A disruption to LNG shipments from one of the world’s largest exporters in Qatar would lead to higher gas prices – which in turn could lead to a rise in gas and electricity bills for households. Like oil, gas prices filter supply chains, affecting the cost of virtually all goods.
UK energy bills have risen by 10% this winter, but are currently forecast to fall slightly in January. Of course, this forecast could change if an escalation of conflict in the Middle East affects global gas supplies and leads to higher prices.
But Ms Bain says the risk of the strait being blocked as a result of the conflict is low.
And if it does happen, Mr Macpherson adds that the impact on Britain will be minimal as most of Europe’s gas is mainly supplied from Norway.
There are many possible outcomes, but what will happen to oil prices in the coming weeks and months “nobody knows,” Macpherson admits.
There’s a “broad spectrum” of what could happen next, he adds, but “there’s really no way to tell where we’ll be this time next week.”
