Aiste Orentas
Tensions between Israel and Iran have reached a new peak, setting the global oil market on edge. Iran’s recent missile strike on Israel was a clear escalation in a conflict that has already far-reached its implications. The whole world is now watching to see how the conflict plays out. As fears grow over Israel’s potential retaliation, particularly toward Iranian oil facilities, global markets are bracing for major supply disruptions that would send energy prices soaring. The United States, with both economic and strategic interests at stake, should focus on helping to diffuse the conflict to prevent this escalation. Diplomatic intervention aimed at containing the conflict could, at this point, avert a catastrophic ripple effect on energy markets, safeguarding not only the U.S. economy but global stability as well.
Image: Demonstrators gather in a rally celebrating after Iran launched a barrage of missiles at Israel in response to the killings of Hezbollah’s leader Hassan Nasrallah outside Imam Jaafar Sadiq Mosque in Tehran’s Palestine Square (Via: Forbes)
In early October 2024, Iran launched a missile attack on Israel, prompting fears of retaliation aimed at Iran’s critical oil infrastructure. Israel, while responding with airstrikes on Iranian military sites, has avoided targeting oil facilities so far. However, experts warn that if Israel shifts its approach and strikes Iran’s oil production capacity, as it has already threatened to do so, the consequences could be immediate and severe. Currently, Iran produces around 3.8 million barrels of oil per day, contributing roughly 3% to global supply, which puts into perspective its influence on the global oil supply. Removing this volume from the market would undoubtedly create a supply gap, sending prices sharply upward and impacting countries globally. To put things into further context, a 5% reduction in oil output in the past has led to price increases above 15%. Right now, a complete cessation of Iranian exports could push Brent crude oil prices well above $90 per barrel.
The potential for oil market disruption extends far beyond Iranian supply losses. The Strait of Hormuz, a strategic passageway controlling nearly 20% of global oil supply flows, could become a flashpoint if tensions escalate further. A conflict like this would not only affect Iranian exports but could jeopardize oil flows from other Gulf states, further amplifying the global supply shock. According to the International Energy Agency, if Iran decides to put a closure on the Strait of Hormuz, it could drive prices toward $150 per barrel – an amount that we haven’t seen since the 2008 financial crisis. An increase like this would have far-reaching economic repercussions, impacting everything from transportation and manufacturing costs to consumer prices on essential goods.
Despite OPEC’s spare capacity, estimated at approximately 3 million barrels per day, it would take weeks or even months to offset the supply shock from a halted flow of Iranian oil. Analysts have warned the market that any prolonged disruption would strain global oil inventories, which are already under pressure from high demand and relatively low reserve levels in key regions. The last time a major producer faced sanctions or significant production cuts, prices surged nearly 30% over a quarter. If the U.S. is able to work with Israel to come up with negotiations and help prevent the conflict from further escalation, it would help advertise this looming crisis and ensure further stability to the markets.
For the U.S., the implications go beyond market volatility. Rising oil prices directly impact American consumers and businesses as higher fuel costs ripple across the economy, driving up inflation and dampening spending power. The Fed has already faced scrutiny over having high interest rates with their battle over inflation, and now that we believe the economy was able to achieve a soft landing, it could all be ruined if rates need to be increased again due to oil scarcity. According to the Energy Information Administration, a $10 increase per barrel in oil typically results in an increase in retail gasoline prices. With U.S. gas prices already elevated, a conflict-driven spike could push average prices above $5 per gallon and, again, intensify inflation concerns for the U.S. economy.
Furthermore, instability in the Middle East could strain U.S. relationships with key regional allies, including Saudi Arabia and the United Arab Emirates, who rely on a stable Strait of Hormuz to maintain their own oil exports. These countries have a vested interest in regional stability, and the U.S., as a long-time ally, would be pressured to engage diplomatically or even militarily if hostilities start to brew too much. The diplomatic cost of inaction could affect not only economic ties but also broader geopolitical alliances that protect U.S. strategic interests in the region, leading to lasting repercussions for the U.S. economy.
In this volatile environment, the final months of the Biden administration have a clear mission, which is to engage in high-level diplomatic negotiations with both Israel and regional stakeholders to ensure that oil infrastructure remains off-limits in any retaliatory strikes. Efforts to ease tensions and clear communications on the economic risks of escalation could prevent this type of catastrophic oil shock. The U.S. has played a strong role in this conflict already, and it's clear that continued economic stability and global energy security require the involvement of the U.S. to deter further military responses that could destabilize an already fragile market.
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