World economies are trying to find ways to cope with spiking oil prices and increasing difficulties in oil shipping and production as the conflict between the US and Israel against Iran enters its second week.
The international oil benchmark, Brent, jumped to $119.50 per barrel at the market open on Monday, before falling slightly to $106 later in the day. Even the US benchmark West Texas Intermediate opened at $119.48 per barrel before retreating to $103. The prices are some of the highest recorded since the beginning of Russia’s invasion of Ukraine in 2022.
Prices fell after G7 countries hinted at the potential use of strategic oil reserves to boost demand. France currently heads the G7, and its President, Emmanuel Macron, said that “the use of strategic reserves is an envisaged option.” France will speak with the other six members during the week to coordinate their response. His position has not been echoed by US President Donald Trump, though. On Saturday, he downplayed the prospect of tapping the country’s Strategic Petroleum Reserve, claiming that US reserves are still strong and that prices will fall soon.
The current high oil prices are sending global economies into turmoil, as many countries rely on Middle Eastern oil and gas for their energy needs. Higher energy costs affect inflation, leading to lower household spending power and, in turn, economic contractions.
Shipping has been halted due to Iran’s chokehold on the Hormuz Strait, the key passage for the Middle East’s oil, through which around 20% of the world’s oil passes. Fear of Iranian missiles towards tankers has all but halted shipping from Saudi Arabia, Kuwait, Iraq, Qatar, Bahrain, the United Arab Emirates and Iran. Due to this menace, Iraq, Kuwait and the UAE have cut oil production.
In addition, production is being slowed down after bombings reached production facilities both in Iran and in other Gulf States. All three countries involved in the war have targeted oil and gas facilities. Oil facilities near Tehran were hit by Israeli missiles, sending the capital of Iran into a near-hell experience with fires and burning oil smouldering all over. Meanwhile, Iran has destroyed Bahrain’s refinery, crippling its production.
The strain is already felt in East Asia, as China and other regional powers are all dependent on Middle Eastern oil. Iran is one of China’s major partners, and the prospect of prolonged shipping delays could push Beijing to look for alternatives, in turn helping to raise prices. Both South Korea and Japan have seen their stock markets decline, with Korea’s main index, Kospi, losing 6% on Monday.
