Middle East Unrest: What the Israel-Iran Conflict Means for Global Oil Prices

The escalating conflict between Israel and Iran has shaken global financial markets, pushing oil prices sharply higher and renewing fears of inflation and economic instability worldwide.

Following a series of missile and drone strikes exchanged between the two countries, Brent Crude — the global benchmark — surged above $78 per barrel late last week. Although it has since dipped to around $74.50, oil is still trading roughly $10 higher than it was a month ago.

This spike, analysts warn, could feed through into higher prices for petrol, food, and travel. The situation is reminiscent of early 2022, when Russia's invasion of Ukraine caused global energy prices to skyrocket.

According to David Oxley of Capital Economics, a $10 rise in oil typically adds around 7 pence per liter to pump prices in the UK. He cautions that “oil is only part of the story,” as natural gas and electricity prices are also influenced by geopolitical events.

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Global Supply Chain at Risk

The key geopolitical risk lies in the Strait of Hormuz, a strategic chokepoint off Iran’s coast where roughly 20% of the world’s oil passes daily. While a blockade remains unlikely, experts note that the risk has grown, contributing to price pressures.

Richard Bronze, head of geopolitics at Energy Aspects, says, “If the conflict spreads or involves disruption to shipping, oil prices could spike further, potentially topping $100 a barrel.”

Such a scenario could significantly impact the global economy, especially if energy costs feed into broader inflation.

Inflation and Central Bank Dilemma

Capital Economics estimates that if oil surpasses $100 again, inflation in advanced economies could rise by about 1%, complicating efforts by central banks to reduce interest rates.

Mohammed El-Erian, chief economic adviser at Allianz, called the Israel-Iran escalation “a bad shock for the global economy at a difficult time.” He warned the crisis adds to the strain on the global economic order already under pressure from previous shocks.

Outlook: Short Spike or Long-Term Pain?

Despite the turmoil, some experts believe the impact may be short-lived. “Unrest in the Middle East is not unusual,” Oxley notes, adding that the latest round of violence could fade quickly if no further escalation occurs.

Additionally, global oil producers, including Saudi Arabia and Brazil, are well-positioned to increase supply if needed, which could help stabilize prices in the coming weeks.

Still, markets remain on edge, with investors watching closely for any signs of prolonged conflict or broader regional involvement.