How could escalation in the Middle East affect the global economy?

Oil prices soared to their highest level in more than a month yesterday after Joe Biden said an Israeli airstrike on Tehran's oil facilities was under discussion.

The cost of Brent crude oil rose by more than 5%, global stocks have "tumbled" and the price of gold "spiked", said The Telegraph. Experts have warned that the escalating conflict in the Middle East could "send a chill through the global economy", said The New York Times.

What did the commentators say?

An attack on Tehran's oil infrastructure could "damage the Iranian economy", said the NYT, and limit the amount of oil the country exports. This in turn "could affect China in particular, a huge buyer of Iranian oil". Tehran could choose to retaliate by trying to block the Strait of Hormuz or attack ships sailing through the region, "snarling the shipments of oil" and "upsetting supply chains more broadly".

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

Petrol prices could "rise for customers in the UK", said the i news site, because although sanctions mean the UK does not import oil from Iran, any disruption to its oil production "could have a knock on oil prices globally".

But it is "not clear" that there would be the kind of "sustained, sharper rises that motorists start to notice at the fuel pump", said Reuters. The United States has "high levels of crude oil inventories" and policymakers in Europe estimate a "durable 10% rise in prices" would be needed to push up inflation by just 0.1 percentage point.

Increased oil production from the US, Brazil and other countries in the past two decades "has diversified the global fuel supply, which means oil markets rely less on Middle East shipments that Tehran could disrupt", said Politico.

On the other hand, if there are further disruptions to trade routes through the Red Sea, the effects "would be more tangible", Oxford Economics told Reuters, because it would hike oil prices up to $130 and knock 0.4 percentage points off global output growth next year.

The Bank of England is "monitoring the Middle East crisis" amid fears that a "worsening conflict" will "leave the global economy vulnerable to a 1970s-style energy shock", said The Guardian. Andrew Bailey, the bank's governor, said that "geopolitical concerns are very serious".

Bailey said if the news on inflation continued to be good there was a chance the bank could become “a bit more activist” in its approach to cutting interest rates. But if rising prices push up inflation, those cuts would immediately be open to doubt.

What next?

Asked how confident he was that there would be a regional war, President Biden said: "Look, I don't believe there is going to be an all-out war. I think we can avoid it."

But Iran's supreme leader Ayatollah Ali Khamenei defended his country's attack on Israel as a "minimum punishment", and, in a rare public speech, he vowed that Iran will not "hesitate" when it comes to dealing with Israel.

As the world awaits Israel's next move, the words of Benjamin Netanyahu continue to echo. After Iran's missile attack on his country this week, Israel's prime minister said Tehran would "pay for it", vowing that "we will stand by the rule we established: whoever attacks, we will attack them".