A Looming Global Economic Threat: Rising oil prices amid Middle East tensions

The latest oil price hikes, fueled by the escalating tensions between Israel and Iran, point to a brewing crisis that will be bound to impact global economies, inflation, and energy security.

The current US President, Joe Biden‘s remarks suggest that his administration might discuss Israel’s possible target to hit Iran’s oil facilities, have shocked the oil market. Brent crude oil has surged 10% due to the prevailing situation, trading at $77 a barrel.

Still, at this level, it is still shy of the peaks seen in 2024 so far, indicating the fragility of the global energy markets under geopolitical instability.

Iran is the world’s seventh-largest oil producer, with half of its output exported primarily to China. The disruption in Iranian oil supplies will have great repercussions, not only for Asian markets but for economies at large.

A blow to Iran’s energy sector would send shockwaves through the energy markets, potentially disrupting supply chains and driving up prices all around the globe.

The crisis is even more worrisome because it potentially thwarts the closure of the Straits of Hormuz, a vital maritime chokepoint for a third of global oil and one-fifth of liquefied natural gas.

Any interruption to this lifeline would accelerate a global energy shortage, mainly in Asia, which has increasingly depended on Persian Gulf oil and gas. Already, the world has grown significantly more dependent on LNG, especially since the Ukraine war, so a global energy crisis is very much imaginable.

So far, the oil market’s response to the tensions between Israel and Iran has been even less vocal than when Russia invaded Ukraine. These fears now increasingly take the form of an escalation of that war and its ripple effects on global energy supplies.

Higher energy prices would have inevitable spillovers in the way of higher fuel costs, higher gas and electricity bills, and heightened inflations. This scenario could easily undo all the work being done by central banks everywhere to restrain the post-pandemic inflationary rise.

This will not be contained within Europe, of course,” Bank of England governor, Andrew Bailey said. “A global energy crisis will set off everywhere inflationary pressures: higher living costs and strain on economies already trying to take their pain from the economic damages caused by Covid-19 and the ongoing conflicts in Eastern Europe and Ukraine.”

As the Middle East teeters on the edge of further escalation, world leaders at the G7 urge restraint over how Israel responds to the new provocations that have been prompted.

The stakes are at their highest ever, particularly in what this will do to wreck the much-needed global economic recovery and reignite inflationary shocks. Everything is now tied to the next moves going to be made in the tussle.

Oil markets are already at the breaking point, creating one of the most daunting factors yet still determining the future fate of global energy stability.