The Impact of the War in Iran on Oil Prices and Its Global Economic Consequences
More than two weeks into the war in Iran, uncertainty surrounding oil prices and the potential economic repercussions for the global economy has intensified. On February 28, as military operations began with the aim of paralyzing the decision-making apparatus, global oil prices jumped by about 12–13 percent in the early hours, with crude oil exceeding $82 per barrel, and then surpassed the $100 mark following the closure of the Strait of Hormuz, which disrupted supplies passing through it. Force majeure was also declared by a number of oil companies in the region due to Iran’s brutal threats against energy facilities. In light of current events, how long might these sharp spikes in global oil prices persist? And what are the economic repercussions of rising energy prices on the global economy?
More than two weeks into the war in Iran, uncertainty surrounding oil prices and the potential economic repercussions for the global economy has intensified. On February 28, as military operations began with the aim of paralyzing the decision-making apparatus, global oil prices jumped by about 12–13 percent in the early hours, with crude oil exceeding $82 per barrel, and then surpassed the $100 mark following the closure of the Strait of Hormuz, which disrupted supplies passing through it. Force majeure was also declared by a number of oil companies in the region due to Iran’s brutal threats against energy facilities. In light of current events, how long might these sharp spikes in global oil prices persist? And what are the economic repercussions of rising energy prices on the global economy?
There are several reasons that increase the likelihood of oil prices rising to $150, according to JPMorgan. First: uncertainty regarding crude oil supply shortages due to the ongoing war and the unknown duration of the Strait of Hormuz closure; this uncertainty alone could push oil prices to historic levels. Second: Declining oil production in the Gulf Cooperation Council (GCC) countries and Iraq. According to official data, the Arab Gulf states and Iraq have reduced their oil production by 6.7 million barrels per day—one-third of their total output—due to shipping disruptions in the Strait. Officials in Iraq announced significant production cuts of about 60 percent, reducing daily output from 4.3 million barrels to approximately 1.5 million barrels per day. Saudi Arabia also reduced its production by between 2 and 2.5 million barrels per day, down from nearly 10.8 million barrels per day. As for the United Arab Emirates and Kuwait, each has reduced oil production by 20–25 percent, equivalent to 500,000 to 800,000 barrels for the UAE and 500,000 barrels for Kuwait. Third: Iran’s brutal aggression against energy facilities in the Gulf states and Iraq, and the continuous and repeated targeting of these facilities.
In an effort to propose practical solutions to stabilize energy prices during the war and mitigate its economic impact on the global market, 32 member countries of the International Energy Agency announced the release of up to 400 million barrels of oil and refined products from their strategic reserves—a move that marks the first of its kind in the agency’s history. Meanwhile, the United States temporarily lifted sanctions on Russian energy companies to ensure the stability of energy prices and the global market. Despite these measures to curb rising oil prices, they will not compensate for the global decline in oil supply passing through the Strait of Hormuz or the daily oil production of countries in the region.
In an effort to propose practical solutions to stabilize energy prices during the war and mitigate its economic impact on the global market, 32 member countries of the International Energy Agency announced the release of up to 400 million barrels of oil and refined products from their strategic reserves—a move that marks the first of its kind in the agency’s history. Meanwhile, the United States temporarily lifted sanctions on Russian energy companies to ensure the stability of energy prices and the global market. Despite these measures to curb rising oil prices, they will not compensate for the global decline in oil supply passing through the Strait of Hormuz or the daily oil production of countries in the region.
In an unexpected move, the U.S. administration announced attacks on military facilities on Kharg Island, noting that oil facilities there handle approximately 90–97 percent of Iran’s oil exports, with China being the primary importer of its oil. If U.S. forces launch military strikes on energy facilities on the island, this could trigger sharp price spikes exceeding $150 per barrel, potentially causing inflation and chaos in the global economy. However, this scenario is unlikely due to its dangerous repercussions, and Iran could retaliate by launching large-scale attacks on oil facilities in the Middle East if the United States were to take such a step.
If oil prices rise to $150 per barrel, a series of dangerous repercussions will occur for the global economy. On the one hand, oil prices reaching the $150 threshold could trigger a global energy crisis similar to the energy shocks of 1973, when energy prices rose by 400 percent. On the other hand, a wave of global inflation would occur, potentially raising prices for goods and services and reducing purchasing power and household spending due to higher production and transportation costs. As a result, these repercussions will lead to a slowdown in global growth, potentially pushing some countries into recession, and prompting central banks to cut interest rates to offset the effects of rising oil prices.
The likelihood of the war dragging on for a long time remains very slim, as the economic, political, and humanitarian costs are exorbitant for everyone: The United States faces growing domestic pressure due to rising fuel prices and their impact on consumers ahead of the elections, while European and Asian countries are suffering from an energy crisis that is reviving the nightmares of the 1970s, and Iran itself is incurring massive losses in its infrastructure and exports. This mutual pressure may push the parties—despite the verbal and military escalation—to seek a quick way out, perhaps through the declaration of a partial U.S. “victory” that allows for the reopening of the Strait of Hormuz and the resumption of oil flows, or through international mediation that ends the conflict before it turns into a full-blown global economic disaster.
Note: This article has been automatically translated, the full article is available in Arabic.
Ali Ebrahim Faqih, Senior Analyst
