Israel’s strikes on Iran, followed by Iran’s retaliation, initially sent shockwaves through global financial markets.
Oil prices surged in response, but after a weekend of missile and drone exchanges between the two nations, the cost of crude has eased slightly.
Even so, oil remains $10 per barrel higher than it was a month ago, fueling fresh concerns that rising energy prices could drive up the cost of everything—from petrol and groceries to travel and holidays.
A similar ripple effect was seen after Russia’s invasion of Ukraine three years ago, with consequences felt across the world.
How much have oil prices risen?
The recent attacks triggered an immediate reaction in the markets.
Brent Crude—the key international oil benchmark—climbed to over $78 a barrel on Friday. Although it has since dipped to around $74.50, that’s still about $10 higher than it was a month ago.
Oil prices frequently fluctuate in response to major geopolitical developments and shifts in the global economy, so a market reaction to the Israel-Iran conflict is not unexpected.
That said, current prices remain well below levels seen a year ago—and far below the highs of 2022, when Russia’s invasion of Ukraine pushed Brent Crude close to $130 a barrel.
Will petrol and other prices go up?
When wholesale oil prices rise, the most noticeable impact for consumers is often at the petrol pump.
However, more expensive energy also affects a wide range of industries—from farming and food production to manufacturing—pushing up prices across the board.
In agriculture, for example, higher energy costs make it more expensive to operate machinery, transport goods, and process or package food. These increases can ultimately lead to higher prices on supermarket shelves.
That said, the effects are not immediate and depend on whether energy prices remain high for an extended period.
Even for petrol and diesel, the impact of rising oil prices is somewhat limited.
“A rough rule of thumb is a $10 rise in oil prices adds about 7p per litre at the pump,” says David Oxley of Capital Economics.
But this isn’t just about oil.
Many still recall the inflation shock triggered by the start of the Ukraine war—largely due to surging gas prices, Oxley points out.
Since last week’s attacks, gas prices have also increased. However, due to the structure of energy markets and regulatory price caps—especially in the UK—any impact on household bills is likely to be gradual, if noticeable at all.
Could Oil Prices Rise Even Higher?
The current situation is “very significant and concerning,” says Richard Bronze, head of geopolitics at research firm Energy Aspects.
Still, that doesn’t necessarily mean it will have the same economic impact as Russia’s invasion of Ukraine or previous Middle East crises.
The key factors that will determine how oil prices evolve include:
- How long the Israel-Iran conflict continues
- Whether regional powers become involved
- If the U.S. intervenes to de-escalate tensions
Most critically, markets are watching for any disruption to the Strait of Hormuz—a vital shipping lane off Iran’s southern coast that handles nearly 20% of the world’s oil supply.
“It’s a narrow choke point and a significant weak spot for global oil markets,” says Bronze.
While a blockade remains unlikely, Iran has previously threatened it, and the risk—though still low—is now more elevated. That heightened uncertainty is helping drive oil prices up.
Without actual disruption to shipping, however, prices may not remain elevated for long.
In 2022, oil prices surged due to rising post-Covid demand alongside the Ukraine war. Today, the global economy is slowing, and major producers like Saudi Arabia and Brazil have spare capacity that could be tapped to stabilize prices.
What Does This Mean for the Global Economy?
The broader economic impact hinges on how the Israel-Iran conflict develops.
“This could be a bad shock for the global economy at a bad time,” warns Mohamed El-Erian, chief economic adviser at Allianz.
“Whichever way you look at it, it’s negative in the short term, and negative in the longer term. It’s another shock to the US-led global economic order, already under strain.”
According to Capital Economics, a return to oil prices above $100 per barrel could push inflation up by 1% in advanced economies—complicating efforts by central banks to lower interest rates.
Still, that’s considered a worst-case scenario.
“Instability in the Middle East is nothing new,” notes David Oxley of Capital Economics.
“In a week’s time, it might all have blown over.”
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