Recent Israeli strikes on Iranian targets, and subsequent Iranian responses, sent global financial markets into turmoil on Friday.
Oil prices experienced a sharp surge, climbing 7% by Friday afternoon. This surge has raised concerns about a potential return to significantly higher energy costs, impacting prices across various sectors—from fuel and food to travel and tourism.
This mirrors the situation following Russia’s invasion of Ukraine three years prior, which had far-reaching global consequences.
Markets reacted swiftly to the attacks. Brent Crude, the international benchmark, saw a surge exceeding 10% before settling around $75 per barrel.
While oil price fluctuations are common in response to major geopolitical events and global economic conditions, the current reaction is noteworthy.
However, Brent crude remains approximately 10% below its price from a year ago and considerably lower than the near-$130 peak reached in 2022 following the Ukraine conflict.
Increased wholesale oil prices directly translate to higher petrol prices for consumers. Further, the cost of energy influences the prices of virtually all goods and services, from agriculture to manufacturing.
In the food industry, higher energy costs impact farm machinery operation, produce transportation, processing, and packaging, leading to elevated shelf prices.
This ripple effect, however, is contingent on sustained high energy prices.
Even with gasoline and diesel, the influence of rising crude prices is limited.
David Oxley of Capital Economics notes, “A rough rule of thumb is a $10 rise in the oil price would add about 7p to the price at the pump.”
However, Oxley cautions against viewing this solely as an oil-driven issue.
He points to the significant price shocks following the Ukraine conflict, largely attributed to elevated natural gas prices. In the UK, many rely on gas for heating, and electricity prices are linked to gas prices.
Following Thursday’s attacks, gas prices have also increased. Yet, Oxley suggests the impact on households will be gradual, if any, due to market mechanisms and price caps.
Richard Bronze, head of geopolitics at Energy Aspects, describes the situation as “very significant and concerning.”
However, he does not anticipate the same level of impact as the Ukraine conflict or prior Middle Eastern crises.
Key factors influencing the situation’s trajectory include the duration of the Israel-Iran conflict, potential regional escalations, and US intervention to de-escalate tensions.
A critical concern is disruption to shipping through the Strait of Hormuz, a vital waterway for approximately one-fifth of global oil production.
“It’s a narrow choke point, a significant weak spot for global oil markets,” Bronze explains.
While currently unlikely, Iran’s past threats and the increased probability of such disruption are contributing to price increases.
Without shipping disruptions, oil prices are unlikely to remain elevated.
In contrast to 2022’s post-Covid economic reopening and subsequent surge in energy demand, the global economy currently faces headwinds. Major oil producers possess the capacity to increase supply, potentially moderating price increases.
The extent of energy price increases and their broader consequences hinges on the future developments in the Israel-Iran conflict.
Mohammed El-Erian, chief economic advisor at Allianz, deems this “a bad shock for the global economy at a bad time,” with negative short-term and long-term implications.
He emphasizes the added instability to the US-led global economic order at a time of existing uncertainties.
Capital Economics estimates that a return to over $100 per barrel oil could add 1% to inflation in advanced economies, further complicating central banks’ efforts to lower interest rates.
However, Oxley considers this scenario less probable.
“Instability in the Middle East is nothing new; we’ve seen numerous bouts of it,” he says. “In a week’s time, it might have all blown over.”
At least 29 jobs have been cut at the Flotta site – a key piece of North Sea oil infrastructure.
Owner Petroineos confirms processing has ceased after 100 years of refining at the site.
The UK Energy Secretary was speaking at the opening of a two day summit on energy security.
The park is part of a £1.3bn regeneration of the area and includes a sculpture of a breaching whale.
The Brockham Wellsite has been given approval to transport waste water to the site every day.