The war in Israel is terrible from a humanitarian perspective. From an economic and investment perspective the concern is that it will lead to a surge in oil prices that will add to inflation, keep interest rates higher for longer and add to the risk of recession. This note looks at the main issues.
Oil prices were already up
So far, the impact on oil prices has been modest with oil prices up about $US4 a barrel to around $US0.87 for West Texas Intermediate since Hamas’ attack on Israel. However, it comes at a time when oil prices had already reversed a large part of their fall into June to just below $US70 a barrel post their rise last year to a high of $US123.7 on the back of the invasion of Ukraine, which was their highest since 2008 when they peaked at $US145. For context, the next chart shows world oil prices since 1970 both in nominal terms (blue line) and after adjusting for inflation (red line). Oil prices are currently high in nominal terms, particularly compared to pandemic lows but in line with their range since the mid-2000s. In real terms they are below the highs reached in the second oil crisis in 1979.
The rebound in oil prices since mid-year reflected a combination of:
production cutbacks by Saudi Arabia and Russia;
the risk of more to come with Russia keen to punish the West;
low inventory levels; and
global oil demand holding up better than feared.
And the fear is that the latest conflict in Israel will send prices even higher.