The ongoing conflict in the Middle East has created the largest supply disruption in the history of oil markets, according to the International Energy Agency (IEA). As reported by The Guardian, the war has cut the region's oil and gas production by at least 10m barrels of oil a day, leading to a global slump in oil production of 8m barrels a day this year.
The IEA warns that the sharp slump in Middle East production could lead to a global slump in oil production, even with increased oil production from countries including Russia. The fall in global oil supplies far exceeds the dent to global oil demand as a result of the war, with the IEA cutting 1m barrels of oil a day from its global oil demand forecasts for this year.
The impact of surging energy costs is also expected to weigh on global economic growth, which could cause demand to fall further. The IEA notes that the situation is complex and that it is too soon to say how great the impact might be. The global oil shortfall is expected to pile pressure on the market, which is already reeling from the shutdown of the Strait of Hormuz.
Oil Price Surge
The oil price has touched $100 again, with Brent crude rising to near $100 a barrel. The surge in oil prices is fanning inflation fears, with the Dow Jones industrial average dropping by 519 points, or 1.1%, to 46,897 points in early trading. Most stocks on the DJIA are down, led by construction equipment maker Caterpillar and Goldman Sachs.
US crude oil is also moving higher, after Iranian Supreme Leader Mojtaba Khamenei said the Strait of Hormuz should remain closed. West Texas Intermediate (WTI) oil is up 8.7% today at $94.92 a barrel, towards levels last seen on Monday. If WTI rises over $100/barrel again, and stays there, it would increase the risks of a recession.
Expert Analysis
Jim Smigiel, chief investment officer at SEI, says that the situation in the Middle East remains fluid, with the closure of the Strait of Hormuz impacting a significant amount of global oil capacity and pushing WTI crude above the $100 threshold. Historically, a price spike of this magnitude is a well-known precursor to recessions and equity bear markets.
US Energy Secretary Chris Wright has also said that global oil prices are unlikely to hit $200 a barrel. Asked by CNN if oil might hit the $200 mark, due to the lack of traffic through the Strait of Hormuz, Wright replied that it is unlikely, but the focus is on the military operation and solving the problem.
Economic Implications
The Iran war is driving up air fares between Asia-Pacific regions and Europe, with a cascade of more than 46,000 flight cancellations triggered across the region since the conflict began. The crisis has wiped out as much as 10% of global airline capacity earlier this month, in the biggest aviation shock since the Covid-19 pandemic.
The surge in oil prices is also expected to weigh on the US stock market, with the Dow Jones industrial average set to fall 349 points, or 0.8%, according to the futures market. The Iran conflict has not caused a spike in US layoffs, with the number of Americans filing new claims for unemployment support last week dropping by 1,000, to 213,000.
Government Response
The UK government should start preparing in case it needs to support households cope with surging energy prices, according to the Institute of Fiscal Studies. In a new report, the IFS points out that the shock to gas prices remains significantly smaller than during the 2022–23 energy crisis, but the government finds itself in a less favourable starting position.
Bobbie Upton, research economist at the IFS, explains that if prices keep rising, the government will face some difficult choices about whether – and how – to respond. Support for households and businesses would help insure them against temporarily higher prices, but a repeat of the blanket support of 2022 would blunt incentives to reduce energy use when supplies are scarce.
