The price of oil has surged by 5% following U.S. President Joe Biden’s statement about discussions regarding potential strikes by Israel on Iran’s oil infrastructure. When asked if he would support such actions, Biden confirmed, “We’re discussing that.”
Iran, the world’s seventh-largest oil producer, exports approximately half of its production, primarily to China. Since Iran’s missile attack on Israel earlier this week, the price of benchmark Brent crude oil has increased by 10%, reaching $77 a barrel, although it remains lower than earlier highs this year.
Any sustained increase in energy prices could lead to higher petrol costs and rising gas and electricity bills, contributing to inflationary pressures. So far this year, oil prices have been moderated by weaker demand from China and ample supply from Saudi Arabia.
In contrast to the significant market reactions following Russia’s invasion of Ukraine in 2022, the oil markets have thus far shown muted responses. However, the escalation of violence in the Middle East and the threat of further actions are now raising concerns.
A key worry is whether any escalation could obstruct the Straits of Hormuz, a vital passage through which one-third of oil tanker traffic and one-fifth of liquefied natural gas (LNG) passes. The global reliance on shipped frozen gas has increased since Russia’s war with Ukraine began, making any disruption significant.
Bank of England Governor Andrew Bailey highlighted the “very serious” potential impacts of these developments and stated he is monitoring the situation “extremely closely.” This turmoil may come at a time when central bankers worldwide had hoped to celebrate a quiet victory over the three-year inflation challenges stemming from the pandemic and the Ukraine conflict.
G7 leaders are reportedly trying to temper Israel’s expected response to Iran’s recent attack, given the implications for global oil markets.