Rising oil prices come to a critical second

Oil prices jumped 5% after US President Joe Biden said the United States was discussing possible Israeli strikes against Iran’s oil industry.

Asked during a visit whether he would support Israel in striking Iranian oil facilities, Biden replied: “We are discussing it. »

Iran is the world’s seventh-largest oil producer and exports about half of its production abroad, mainly to China.

Since the Iranian missile attack on Israel on Monday, the price of benchmark Brent crude oil has risen 10%, to $77 a barrel, although that remains below levels seen earlier this year.

Any prolonged rise in energy prices raises the possibility of higher gasoline prices and higher gas and electricity bills, thereby increasing the rate of inflation.

Since the start of the year, weaker demand from China and ample supply from Saudi Arabia have helped keep oil prices low.

The reaction of oil markets has so far been much more muted than, for example, Russia’s invasion of Ukraine in 2022.

But the escalation of violence in the Middle East and the threat of new measures are now weighing on the markets.

Of particular concern is whether an escalation could block the Strait of Hormuz, through which a third of tanker traffic and a fifth of frozen LNG gas must pass.

Since the start of the war between Russia and Ukraine, the world has become more dependent on frozen gas transported by LNG tankers.

Although Asia is most physically dependent on oil and gas flows from the Persian Gulf, the immediate price impact of such developments would be significant.

Bank of England Governor Andrew Bailey warned on Thursday of the potential affect “very serious” and that he followed the evolution of the situation “very closely”.

All this could come just as the world’s central bankers declare a quiet victory over the three-year inflationary shock caused by the pandemic and the war in Ukraine.

This could explain why G7 leaders are trying to moderate Israel’s expected response to the Iranian attack.