Oil prices surged by 5% following remarks from U.S. President Joe Biden about ongoing discussions regarding potential Israeli strikes on Iran’s oil infrastructure.
When questioned during a visit about supporting such strikes, Biden replied, “We’re discussing that.”
Iran ranks as the seventh-largest oil producer globally, exporting about half of its output, primarily to China.
Since Iran’s missile attack on Israel on Monday, the price of benchmark Brent crude oil has risen by 10%, reaching $77 per barrel, though it remains below earlier highs from this year.
A prolonged increase in energy prices could lead to higher gasoline costs and elevated gas and electricity bills, contributing to inflation.
This year, weaker demand from China and abundant supply from Saudi Arabia have helped keep oil prices in check.
In contrast to the sharp market reactions during Russia’s invasion of Ukraine in 2022, the response to the current situation has been relatively subdued.
However, the rising violence in the Middle East and the looming threat of further military actions are now unsettling the markets.
Of particular concern is the risk that any escalation could obstruct the Straits of Hormuz, through which a third of oil tanker traffic and a fifth of liquefied natural gas (LNG) must pass.
Since the onset of Russia’s conflict with Ukraine, global reliance on LNG shipped via tankers has increased.
While Asia is the most dependent on oil and gas flow from the Persian Gulf, any disruptions would significantly impact prices worldwide.
Bank of England Governor Andrew Bailey cautioned on Thursday about the “very serious” potential consequences and stated that he is closely monitoring the situation.
These developments come at a time when central bankers globally were beginning to feel they had managed the inflation shock from the pandemic and the Ukraine war.
This context may help explain why G7 leaders are attempting to temper the anticipated response from Israel to Iran’s actions.
