As conflict escalates in the Middle East, rising oil prices are being closely watched.
The price of oil affects everything from the price of food at the supermarket to the cost of refueling your car.
As the conflict intensifies, the price of crude oil has risen nearly 10% this week to around $78 a barrel.
This may seem like a big jump, but the price of crude oil remains volatile, and following Russia’s invasion of Ukraine, a barrel of benchmark Brent crude reached nearly $130.
The rise comes as many countries, including Britain, are beginning to recover from the Covid pandemic and a sharp rise in oil prices following Russia’s war in Ukraine. So how concerned should we be?
Crude oil is a major component in petrol and diesel, meaning higher oil prices could push up prices at the pumps when they have reached their lowest level. Lowest level in three years.
If a company that delivers goods, such as food, is affected by higher fuel costs, its prices are also likely to increase. The burden of these increased costs can be passed on by supermarkets to us, the consumers. Cost of living increases.
Calum McPherson, head of commodities at Investec, tells the BBC: “Everything we go and buy in the shop has been moved around and is made from things that have been moved around. Fuel “Cost increases filter into everything.”
Bank of England Governor Andrew Bailey, who sets interest rates, has warned that the conflict in the Middle East is likely to have a “very serious” impact on Britain.
Mr. Bailey said he was Watching the developments “very closely”. It came as he signaled that interest rates are headed downwards, and the UK’s prospects on inflation – which has been driven down by higher oil and gas prices in 2022 – are looking brighter.
Still, the rise of nearly $78 a barrel so far is not time for alarm bells.
Caroline Benn, chief commodities economist at Capital Economics, says that if the “worst-case scenario” of further increases does not happen, oil prices are likely to go “down very quickly.”
Iran is the world’s seventh largest oil exporter, with half of its exports going to China. If supplies are disrupted, China may turn to Russia.
But Ms Ben warned that the markets are “fully balanced”, and if the conflict escalates, “taking out a medium-sized supplier like Iran will drive up prices”.
She says there is “more than enough capacity” globally to cover the gap if Iranian production ends, but questions remain about Saudi Arabia’s “loyalty” as the world’s second-largest oil producer. Where will it take place and will it go ahead or be restricted production?
Mr McPherson says if Israel decided to attack Iran’s oil fields, a rise in the price of Brent crude could increase the cost of refueling at the pumps “quite rapidly”.
He points out that this scenario could threaten general inflation in the UK, which in turn could impact any decision by the Bank of England to lower interest rates.
However, he also points out that “ultimately there may be no supply disruption”.
The direct impact on Iran’s oil production is not the only concern.
There is a risk that any increase in the area could block the Strait of Hormuz, a relatively narrow channel through which a large amount of oil tanker traffic passes – about a third of all sea-traded oil.
It is also the route through which one-fifth of liquefied natural gas (LNG) is transported, a commodity on which the world has become more dependent since sanctions were imposed on Russia following its invasion of Ukraine.
Asia is most materially dependent on oil and gas flows from the Persian Gulf, and the immediate impact of an increase would be significant.
Disruptions in LNG shipments from Qatar, one of the world’s largest exporters, will push up gas prices – which could result in rising household gas and electricity bills. Like oil, gas prices affect supply chains, affecting the cost of almost all commodities.
UK energy bills have increased by 10% this winter, but are currently expected to fall slightly in January. This forecast could certainly change if escalating conflict in the Middle East affects global gas supplies and increases prices.
But Ms Ben says the risk of the strait being blocked as a result of conflict is low.
And if it does occur, Mr McPherson says the impact on Britain will be minimal, given that most of Europe’s gas is supplied mainly from Norway.
There are lots of possible outcomes, but “no one knows” what will happen to oil prices in the coming weeks and months, Mr McPherson admits.
He added that there is a “wide spectrum” of what could happen next, but “there’s really no way to tell where we’ll be at this time next week”.
