Oil prices have scarcely been affected by the conflict in the Middle East that was triggered by the October 7 2023 Hamas attack on Isreal in which militants killed about 1,200 Jews and took 251 hostage. Israeli air strikes on Gaza and the ground campaign by the Isreal Defence Forces (IDF) has seen over 40,000 Palestinians lose their lives.
Yet, crude oil prices remained steady. Until last week when the tit-for-tat missile attacks between the Iran and Isreal started to make an escalation of the conflict likely. On Friday 4 October, Brent Crude, the international bench mark grade for oil, sold for $78.05 a barrel, the highest it has hit since January 2023.
12 Million Barrels of Oil Could Be Blown off the Market
The Middle East produces a third of global crude oil. Late on Tuesday, Iran launched 188 missiles against Israel and Isreal has promised “serious and significant” response. How Isreal responds could determine if oil exports from the Middle East will be taken off the market. Isreal may attack oil facilties in Iran, knocking off a significant part of the 1.6 million the country exports.
How Iran responds to the attack will be decisive. Iran has announced that if Isreal attacked its oil facilities, it would retaliate with attacks on the oil production capacity of American allies, Saudi Arabia and the United Arab Emirates (UAE), that export 5.741 million and 2,651.100 barrels per day respectively.
This scale of escalation of the conflict could see “runaway oil prices” of $150 a barrel or higher, according to Claudio Galimberti, chief economist at Rystad Energy who spoke to the Financial Times.
This would lead to a rapid rise in energy prices and inflation, putting paid to exceptions of a “soft landing” for the major western economies i.e. the easing of inflation to the target rate of 2% without the need for interest rate hikes that would cut lending and economic activity and lead to a recession.
