Rising oil prices continue to impact the global economy due to the war with Iran. Now, some analysts are saying the worst may yet be ahead as the conflict drags on.
The worry is that beyond the immediate impact of rising gasoline prices, the war’s disruption could come in waves – lasting for weeks and months and leaving parts of the global economy untouched.
“We haven’t seen the brunt of this yet,” said Samantha Gross, director of energy security and climate at the Brookings Institute. “I think the markets are underestimating the impact of the war so far. It seems like they expect this war to be over soon, and they expect we can go back to the world before it’s over. And I don’t think either of those views are true.”
The warning signs are already here. The global oil price benchmark, Brent crude – which heavily influences US gasoline prices – briefly rose above $119 a barrel last week, the highest level since the war began and a level last seen in July 2022 amid a wave of pandemic-era inflation. By Monday, Brent prices had stabilized at around $113 a barrel.
Yet analysts say those new highs could soon be eclipsed if the conflict in the Middle East remains volatile. In other words, current prices do not yet reflect the extent of the shortages that are expected should a protracted conflict occur.
“It is clear to me that if this crisis lasts more than three or four months, it becomes a systemic problem for the world,” Patrick Pouyané, chief executive of oil giant Total, told a global energy conference in Houston earlier this month. According to Bloomberg News.
The most visible choke point for oil supplies from the Gulf remains the Strait of Hormuz, through which 20% of the world’s oil and liquid natural gas transited before February 28. Ship traffic through the strait remains low as Iran takes advantage of tighter control over the route to extract concessions from the US. From more than 100 ships per day before the conflict, daily traffic through the strait is now less than five ships. data From the International Monetary Fund.
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This has left millions of barrels of oil as well as other key commodities blocked and unable to reach global markets. As global businesses begin to run out of supplies, the cost of sourcing alternative materials could rise.
Even beyond the Strait of Hormuz, major fossil fuel production facilities, including liquefied natural gas (LNG), a vital energy input, have been hit by tit-for-tat attacks across the Middle East.
The longer the fissure remains shut down, and until those facilities are fully back online, the world will face energy shortages that will have a profound impact on the U.S. economy.
The impact on American drivers has already been significant. Average gasoline prices climbed to $3.99 a gallon on Sunday, their highest level since the summer of 2022. Patrick de Haan, chief analyst at Gas Buddy, estimates that, by some time this week, motorists will have spent an additional $10 billion on gas compared to pre-war levels. This means disposable income has declined by about $35 per month.
And that’s just the direct impact of higher prices at the pump for regular motorists. Higher oil prices lead to higher costs overall throughout the economy, as the expense of transporting goods, as well as the cost of raw materials and packaging, becomes higher. diesel prices Now just below the record price seen in June 2022.
“Rising oil prices will push up input, transportation and manufacturing costs at a time when demand remains fragile,” analysts at Moody’s credit rating agency said in a note published last week.
Increases in global liquefied natural gas prices have less direct impact on the US due to ample domestic supplies, particularly from shale. Some analysts said that in general, the US economy is somewhat insulated from the current shock compared to previous similar episodes given its domestic energy production capabilities. Furthermore, overall dependence on oil is lower than in the 1970s due to increased efficiency and the economy’s greater reliance on services.
“At this stage, the appropriate characterization of the potential impacts of an oil price shock for the US economy is growth fears rather than an impending recession,” analysts at S&P Global consultancy said. a comment Published last week.
Yet the U.S. economy will not be completely insulated from the global economic downturn caused by slower consumption and investment in other parts of the world, caused by higher energy prices there.
“The current macro environment is a toxic mix of the same vulnerabilities that plagued the global economy in the last recession,” Peter Berezin, chief global strategist at BCA research firm, said in a note published Sunday night.
Many analysts are now saying that, as a result of rising oil prices, the average annual rate of US inflation will be around 3%, compared to the Federal Reserve’s 2% target. The new figure would be an additional $150 per month or $1,800 per year for a family with a $5,000 monthly expense.
President Donald Trump continues to try to reassure the market that the situation is under control – although with each passing day, investors are becoming more skeptical of his ability to control price fluctuations. Yet he continues to send mixed signals about US intentions: On Sunday evening, he said he believed a deal would be reached – only to post on social media on Monday that Iranian oil facilities would be destroyed if no deal was reached. He has not yet ruled out any military options that could ultimately stabilize markets, including using US ground troops to seize Iranian oil infrastructure or taking direct control of the Strait of Hormuz.
Analysts are now considering scenarios in which global oil prices reach $200 a barrel in the short term if Iranian export facilities are damaged due to US escalation. According to Reuters.
Barring a worse-case scenario, analysts say there has been unquantified damage to global energy supplies that is just beginning to be felt. Barring a material change involving the US ability to directly control oil flows into the region, the price of oil is likely to remain elevated indefinitely.
“Even if the conflict ends tomorrow, supply disruptions will likely persist for a long time, given the damage we’ve seen to energy infrastructure that needs to be repaired,” said Andy Lipo, president of Lipo Oil Associates consultancy. And even once major production facilities affected by the conflict come back online – something that could take months – “additional geopolitical risks to doing business in the Middle East will be assessed, as there is no guarantee that this could not happen again,” he said.
