Why the price of oil matters more than you might think

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Natalie Shermanand

Mitchell Labiak,Business reporters

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The impact of the US and Israel’s war in Iran is starting to hit home — no matter where you live.

As the conflict blocks oil, gas, and other exports from the Gulf region, and producers start to cut output, the supply shock has sent prices soaring.

This has rattled financial markets. However, it is also affecting people’s day-to-day lives, with prices for petrol and diesel at the pump already rising.

And the effects could get wider still with the possibility that everything from food prices to holidays could become pricier.

Analysts have also raised the possibility of an economic downturn, with some countries more at risk than others.

White House says oil price spike ‘temporary’

“This is essentially the biggest supply shock at least in modern global oil market history,” said Hunter Kornfeind, senior macro energy analyst of Rapid Energy Group.

Motorists across the world are feeling this at the pump.

In the US, average petrol prices have risen above $3.50 (£2.60) per US gallon, from about $2.92 a month ago, while diesel had risen from $3.66 to $4.78 over the same period, according to the American Autombile Association.

In the UK, the most recent data from the RAC motoring organisation shows that since the war began, average UK petrol prices have risen by 4.95p to 137.78p a litre. Diesel has increased by 9.43p to 151.81p.

There is normally a time lag, with movements in oil markets taking about a fortnight to feed in to fuel prices.

Watch: How worried are Americans about rising petrol prices from the Iran war?

Meanwhile, the Gulf is where Europe gets around half of its jet fuel from. The disruption has caused the continent’s benchmark jet fuel price to almost double to its highest level since the wake of Russia’s invasion of Ukraine.

Fuel typically makes up 20-40% of airlines’ operating costs. This means flights could become more expensive, while any shortage of fuel could mean some flight cancellations.

However, the impact might not be equal across the board.

Many European airlines use contracts to get their fuel at fixed or capped prices for months, or even years, in advance.

By contrast, a number of large US carriers do not do this and could be exposed to short-term price increases as a result.

United Airlines boss Scott Kirby recently warned that a jump in air fares due to the higher costs would “probably start quick”.

Follow live updates on the Iran conflict

Mixed messages from Trump leave more questions than answers over war’s end

But the economic pain could spread quickly.

If the conflict is not resolved by the end of the month, analysts say that it could push global oil prices above the recent 2022 peaks seen after Russia’s invasion of Ukraine. In some scenarios, analysts said the price could hit $150 per barrel.

Kornfeind said that the knock-on impact for the economy would be “pretty drastic” at that point, as higher costs force households and businesses to reduce other spending and the wider economy slows.

For example, analysts are worried the energy crunch could reduce chip-making - a sector with ramifications for everything from cars to smartphones, since Taiwan, a hub of production, relies heavily on energy imports.

In the US, some have also raised concerns that a jump in energy costs could weigh on tech firms trying to build out their artificial intelligence (AI) infrastructure, hitting a key driver of economic growth.

Analysts say the economic risks are greatest in Asia and Europe, which both rely on energy imports, unlike the US which is a top oil and gas producer.

Some governments in Asia, a top destination for much of the oil and gas coming from the Middle East, have already announced price caps and rationing measures, with universities in Bangladesh closing early for the Eid ⁠al-Fitr holidays, according to state media.

The risks have been reflected in the stock market, with Asian and European indexes hit especially hard.

In Japan and South Korea, for example, the main stock indexes have fallen by roughly 10% and 15% respectively since the war began, while Germany’s Dax has fallen by more than 7%.

By contrast, the S&P 500 in the US has fallen just 1.2%.

However, energy is not the only commodity that has been affected.

The Middle East is also a major source of aluminium and sulphur used to process metals such as copper, and ingredients for fertiliser, including urea.

As prices for those commodities start to creep higher, the pressure could feed through to the costs of food and manufactured goods.

In the US, about 25% of fertiliser imports enter the US in the months of March and April, as planting season starts, according to the American Farm Bureau Federation.

“It could not come at a worse time,” said farmer Harry Ott, who grows cotton, corn and soybeans in South Carolina.

He called his fertiliser supplier last week, aiming to start applying it to his fields, only to be told that the business was holding off on sales and deliveries until it had a better handle on the impact of the war.

The business has since announced a price hike, which he fears will raise his fertiliser bill by roughly $100 per acre and wipe out his chance of making any profit on this year’s crop.

“These are trying times and what we are going through now on fertiliser… was totally unexpected,” Ott said in a briefing for reporters hosted by the Farm Bureau. “Nobody’s balance sheet had room to make these adjustments.”

Ott’s business is yet another unexpected victim of a conflict that affects us all.

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