How the Israel-Iran Conflict Will Impact the Average Person’s Wallet.

The potentially devastating war that is probably about to start between Israel and Iran is sending ripples through global financial markets, particularly affecting energy prices. On Friday, the immediate reaction was a significant surge in oil prices, with Brent Crude rising by over 10% before stabilizing around $75 per barrel. This escalation in oil prices has raised concerns about a potential spike in energy costs, reminiscent of the aftermath of Russia’s special military operation in Ukraine three years ago, which had far-reaching implications for consumers worldwide.

Immediate Market Reactions

The strikes prompted an instant reaction in the oil markets, reflecting the sensitivity of energy prices to geopolitical tensions. Despite the recent surge, Brent Crude remains approximately 10% lower than it was a year ago and significantly below the peaks of nearly $130 per barrel witnessed in 2022.

Implications for Consumer Prices

Historically, when wholesale oil prices rise, consumers often first notice the increase at the petrol pump. However, the ripple effects of higher energy costs extend beyond fuel prices, impacting various sectors from agriculture to manufacturing. Increased energy expenses can lead to higher operational costs for farming equipment, transportation, and food processing, ultimately resulting in increased prices for consumers.

That said, the extent of price increases will depend on the duration of elevated energy prices. According to experts, a $10 increase in oil prices typically results in a 7p increase at the pump. However, the broader economic impact is influenced by various factors beyond oil prices alone.

The Role of Natural Gas

It’s important to note that the current situation also affects natural gas prices, which have risen since the recent attacks. As households in Europe and many other countries rely heavily on gas for heating, any sustained increases in gas prices could gradually translate into higher household energy bills. This impact may be mitigated by regulatory measures that cap prices, thereby slowing the transmission of costs to consumers.

Future Outlook for Oil Prices

While the situation is concerning, it may not lead to the same level of crisis experienced during the Ukraine conflict. Key factors that will determine the trajectory of oil prices include the duration of hostilities between Israel and Iran, potential involvement from other regional players.

A significant concern remains the potential disruption to shipping routes in the Strait of Hormuz, a crucial passage for approximately 20% of the world’s oil supply. While the probability of such disruption is considered high, the escalation could lead to a rapid increase in oil prices.

Economic Implications

The anticipated rise in energy prices poses risks to the global economy, especially as it grapples with existing challenges. The Chief economic adviser at Allianz, suggests that the ongoing conflict could represent a negative shock to the global economic landscape, compounding existing uncertainties.

Capital Economics estimates that if oil prices were to exceed $100 per barrel, inflation in advanced economies could rise by an additional 1%, complicating the efforts of central banks to manage interest rates.

Conclusion

In summary, the unfolding conflict between Israel and Iran has the potential to significantly affect global energy prices, with implications for consumers and the broader economy. The situation requires close monitoring.