Oil prices jumped 5% after US President Joe Biden said the US was discussing possible attacks by Israel on Iran’s oil industry.
When Biden was asked during a visit whether he would support an Israeli attack on Iran’s oil facilities, he said: “We are discussing it.”
Iran is the world’s seventh-largest oil producer, exporting about half of its production abroad, primarily to China.
The price of benchmark Brent crude has risen 10% to $77 a barrel since Iran’s missile attack on Israel on Monday, although it remains below levels seen earlier this year.
Any extended increase in energy prices is likely to cause gasoline prices to rise and gas and electricity bills to rise, thereby increasing the inflation rate.
So far this year, weak demand from China and ample supplies from Saudi Arabia have kept oil prices under pressure.
For example, oil markets have been much slower to react so far than to Russia’s invasion of Ukraine in 2022.
But the threat of increased violence and further action in the Middle East is now looming over the markets.
Of particular concern is whether any increase could block the Strait of Hormuz, through which a third of oil tanker traffic and a fifth of LNG frozen gas passes.
The world has become more reliant on frozen gas shipped in LNG tankers since the start of Russia’s war with Ukraine.
Even though it is Asia that is most materially dependent on oil and gas flows from the Persian Gulf, the immediate price impact of such a development would be significant.
Bank of England Governor Andrew Bailey warned on Thursday regarding the potential impact as “very serious” and that he was following developments “extremely closely”.
All this could happen just as the world’s central bankers declared a quiet victory over three years of inflationary shock from the pandemic and the Ukraine war.
This may help explain why G7 leaders are trying to play down the expected response from Israel to the Iranian attack.
