Oil prices jumped sharply after Israel launched airstrikes on Iran, escalating tensions in the Middle East. This surge threatens to worsen challenges for the global economy, which has already been struggling with trade disputes throughout the year.
Following the attacks, oil prices rose as much as 13%, with Brent crude briefly topping $78 a barrel. JPMorgan warned that in a severe scenario, prices could spike to $130 per barrel if shipping through the Strait of Hormuz is blocked or if conflict spreads further in the region, which produces about one-third of the world’s oil.
Katrina Ell, head of Asia Pacific economics at Moody’s Analytics, said the timing is unfortunate. The global economy is already facing uncertainty due to US protectionist policies, and higher oil prices add to the strain.
Bloomberg Economics analysts noted that sustained oil price increases would fuel inflation in the US, already pressured by tariffs. A rise in Brent crude to $100 a barrel could push gasoline prices up 17%, raising the US consumer price index (CPI) by 0.6 percentage points to 3.2% year-over-year in June.
Central banks, including the Federal Reserve, are meeting next week amid this volatility. Experts expect them to acknowledge the risks but not change interest rate plans immediately. Diana Mousina, deputy chief economist at AMP Ltd., said the oil price jump is “just another layer of volatility” and unlikely to alter rate trajectories unless it becomes prolonged.
A prolonged conflict could disrupt liquefied natural gas (LNG) exports through the Strait of Hormuz, a vital route for about 20% of global LNG trade, especially from Qatar. This would tighten global gas markets and push European prices higher.
TD Securities strategist Prashant Newnaha warned that markets will demand a higher risk premium, leading to more volatility, weaker stocks, and a stronger US dollar.
While supply risks are real, OPEC+ members, led by Saudi Arabia, have spare capacity that could ease shortages. The International Energy Agency might also release emergency reserves to calm markets.
Emerging Asian economies with large trade deficits, such as India, the Philippines, Thailand, and Vietnam, are most vulnerable to higher oil prices. Some advanced economies like Japan, Italy, France, Germany, and the UK also face risks due to their trade shortfalls.
Luci Ellis, chief economist at Westpac Banking Corp., said central banks will likely treat the oil spike as a supply shock unless it lasts long or affects inflation expectations. The main impact will be on inflation and consumer confidence rather than direct damage to global growth, given the relatively small size of the Israeli and Iranian economies.
Ellis added that geopolitical uncertainty remains high despite easing trade tensions. Central banks will wait to see how events unfold before making major policy changes.
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