The impact of the US and Israel’s war in Iran is starting to hit home – no matter where you live.
As the conflict blocks oil exports from the Gulf region, and producers start to cut output, the supply shock has sent oil soaring toward $85 per barrel, rattling financial markets, driving up prices at the pump and raising fears of a bigger economic hit.
Oil supply shock
The war has been an unwelcome reminder of the world’s ongoing dependence on the Middle East for energy supplies, recalling supply shocks that hit the world in the 1950s and 1970s.
But analysts say the impact this time is much larger.
Roughly 20% of the world’s crude supply travels through the Strait of Hormuz, where the war has blocked ship traffic.
Analysts say oil and gas producers outside the region, in countries like the US, Brazil and Norway, have limited ability to ramp up production.
And while local oil pipelines have some capacity to serve as an alternate route, they do not have enough – forcing producers in the region to announce cuts. In Iraq, output is down by more than 60%, according to Reuters, while Kuwait and the United Arab Emirates are also scaling back.
Nor are the energy strains limited to oil. About 20% of the world’s natural gas supplies are also down, after Qatar’s state energy firm halted production, citing military attacks.
With no easy way to plug the gaps, analysts at JP Morgan say they expect “visible shortages” to emerge in Asia and Europe within a week.
In Asia, which is particularly dependent on energy imports, some governments have already announced price caps and rationing measures, with universities in Bangladesh closing early for the Eid al-Fitr holidays, according to state media.
In the UK, Chancellor Rachel Reeves has warned of the risks of an inflationary shock.
Some countries have discussed plans to release oil reserves to try to relieve the crisis, but the impact of such a move would be limited. Hunter Kornfeind, senior macro energy analyst of Rapid Energy Group, said the scale of any release would be “peanuts” in comparison to the demand.
“This is essentially the biggest supply shock at least in modern global oil market history,” Kornfeind said.
“We’re talking apples to oranges in terms of the need.”
Higher energy prices
What the shock means, for now, is higher energy prices.
Brent crude and the US benchmark, West Texas Intermediate, have both surged since the war began, approaching $120 per barrel at one point on Monday, before falling back to just under $85 per barrel.
That is feeding through to costs faced by businesses and households.
In the UK and Europe, natural gas prices have almost doubled since before the war in Iran began.
Even in the US, which as a major oil and gas producer tends to relatively shielded from global price fluctuations, prices at the pump are approaching $3.50 per gallon, up from roughly $2.90 a month ago, back to levels last seen in 2024.
Last week, Goldman Sachs estimated that a temporary rise in oil prices just to $100 per barrel could knock 0.4 percentage points off of global economic growth.
But if the conflict is not resolved by the end of the month, analysts say that it could push global oil prices above the recent 2022 peaks seen after Russia’s invasion of Ukraine, with a chance of oil hitting $150 per barrel in some scenarios.
Kornfeind said that the knock-on impact for the economy would be “pretty drastic” at that point, as higher costs force households and businesses to reduce other spending and the wider economy slows.
