An energy price shock is very much a possibility, and Europe is not well-placed to cope with that.
Michael Roberts is an Economist in the City of London and a prolific blogger.
Cross-posted from Michael Roberts’ blog
Oil prices rose nearly 9% toward $73 per barrel today, the highest in over eight months, as the joint US and Israeli strikes on Iran sharply escalated tensions across the Middle East. And it seems that the narrow Strait of Hormuz, a vital chokepoint that handles roughly one-fifth of global oil shipments and significant volumes of natural gas, is now being blocked (despite Tehran insisting the strait remains open). Shipping companies are rerouting vessels away, and insurance companies are sharply increasing premiums.
OPEC+ agreed on Sunday to increase production by 206,000 bpd in April, ending a three-month pause, but that’s well below the 411,000–548,000 bpd that had been previously considered. So it is unlikely to make a difference to the short-term disruption to oil supply. However, although crude oil prices are up, they are nowhere near as high as they reached in the post-pandemic energy price surge.
Two things need to happen before oil prices shoot up to $100/b or above. First, there must be significant and prolonged disruption of all traffic through the Strait of Hormuz, given that the Strait carries about one in five barrels of oil in the world. Second, the missile and drone attacks must start hitting oil production installations. So far, these installations across the Middle East have been studiously avoided – and that includes Iran’s.
If those two factors come into play, then the oil price per barrel could be in triple figures. But remember, global oil production and supply are well above global demand because of the relative slowdown in global economic growth and the increasing switch to renewables. Last year it is estimated that global liquid fuels consumption increased by 1.1 million b/d in 2025 and may rise by 1.2 million b/d this year. But global oil production growth will continue to outpace oil consumption so that oil inventories will increase by 3.1 million b/d in 2026.
Although China relies for much of its oil from the Middle East (mainly Saudi Arabia), it has been building up its strategic stockpiles for just such events and because of worries about US sanctions. So China is well placed to deal with any shortages; and it can still turn to more oil imports from Russia and from South America, where it has been increasing supply in recent years to avoid the Middle East. The US has plenty of strategic stockpiles and, of course, its own domestic production. However, for many parts of the Global South and for east Asia (Japan and Korea), as well as Europe in general (where Russian oil supply has been ended), the situation could be much tighter if the conflict continues for a long time.
Another factor helping to keep oil prices from exploding is the coming into supply of Venezuelan oil. Licences have been granted to US trading companies to export oil. Much of the oil transported previously bound for China, is now going to terminals around the Caribbean before being sold to US Gulf Coast refineries. Venezuela’s oil production is likely to be back at pre-US sanction levels soon.
Trump is hoping and expecting a quick conflict that will bring the Iranian regime down or force its current leaders to submit to US terms. Then oil prices will come back to ‘normal’ – in effect the ‘Venezuela outcome’. But Iran is not Venezuela. The history of US imperialist and Israeli ‘interventions’ in the Middle East suggests prolonged chaos, this time in a country of 90m people. There is no organised opposition to the regime within Iran and, so far, the new leaders of the regime seem determined to retaliate for some time ahead.
If the war does get prolonged, it would keep oil prices high and despite the generally favourable balance of supply and demand long term, that could feed through to higher inflation in the major economies. US consumer price inflation, already stubbornly above the Fed’s target rate of 2% a year, could hit 4% instead. Rising energy prices are also a tax on consumption and investment, so economic growth could also lose a few basis points over the year.
A prolonged conflict could seriously damage growth in the Middle East. The Gulf states would lose their lucrative tourist traffic and airlines may be forced to bypass the area for global transit. The heady days of luxury lifestyles for foreigners would be over in these places.
So far, the US financial markets are unmoved, except that the gold price has reached new highs (the safe asset to hold in crises). But note too, that the dollar has risen against other currencies, a further indication that all the talk about the dollar’s imminent demise is wishful thinking. And what does the US-Israeli unprovoked ‘pre-emptive’ strike on Iran say about the resistant power of the BRICS+ group?
Be the first to comment