Will escalating Middle East tensions push up oil and gasoline prices?

Any escalation of tensions in the Middle East would evoke memories of the oil embargo that followed the Yom Kippur War in 1973, which caused oil prices to quadruple.

Over the past week, Iran launched missiles at Israel, prompting the Middle Eastern nation to threaten retaliation. This increased tension raises the risk of disrupting the flow of oil from the Middle East to the rest of the world , potentially driving up oil prices.

Many fear that oil prices will continue to rise, leading to an increase in global gasoline prices and potentially a return of high inflation to threaten the world economy .

In fact, oil prices rose by more than $6 per barrel in the week from September 30 to October 4, leading to an increase in gasoline prices. In the US market, the average price for a gallon of gasoline (3.785 liters) increased by 5 cents compared to the previous week.

Any escalation of tensions in the Middle East would evoke memories of the oil embargo that followed the Yom Kippur War in 1973, which caused oil prices to quadruple.

However, global oil supply has changed significantly since the 1970s, with the United States – a shale oil powerhouse – becoming the world's largest oil producer.

For months, as fighting continued between Israel and Hamas and Hezbollah forces, oil prices fluctuated within a narrow range and barely increased. Experts believe that only a direct confrontation between Israel and Iran would significantly impact oil prices.

Gasoline prices have risen, but are cheaper than last year.

Gasoline prices in the U.S. typically move in the same direction as crude oil prices, as oil accounts for half the cost of each gallon of gasoline.

According to the American Automobile Association (AAA), the average price of gasoline nationwide is currently around $3.18 per gallon. However, this is still 13 cents lower than a month ago and 60 cents lower than a year ago. The record high average price for gasoline in the U.S. was $5 per gallon, recorded in June 2022.

Therefore, AAA spokesperson Andrew Gross stated that despite the risk of war and the ongoing hurricane season, domestic gasoline prices in the US continue to trend downward.

AAA estimates that approximately 1.2 million of its members live in households with one or more electric vehicles. Therefore, low gasoline demand and low oil costs are likely to keep gasoline prices falling in the coming months.

Oil price outlook

Oil prices are projected to fall in the long term, rather than rise. This is the view of most economists, as the supply-demand balance for oil is tilted towards supply – a factor that typically negatively impacts oil prices. Export ports such as Kharg Island in the Persian Gulf could be targets of Israeli attack.

This port plays a crucial role in transporting crude oil from Iran to other countries, primarily in Asia, including China. Currently, Iran produces 3.99 million barrels of oil per day, accounting for 4% of the world's total production. For comparison, Saudi Arabia produces approximately 9 million barrels per day.

Despite Western sanctions hindering production and exports, Iran has managed to maintain its national oil industry and expand exports.

As of mid-year, the country was exporting approximately 2 million barrels of oil per day, up from 500,000 barrels per day in 2020, but still lower than the 2.5 million barrels per day in 2018. An Israeli attack would certainly jeopardize Iran's oil supply.

But in its most recent energy market update, the International Energy Agency (IEA) said global oil demand in the first half of 2024 grew at the slowest pace since 2020.

Meanwhile, supply continues to increase, and the Organization of Petroleum Exporting Countries (OPEC) and its partners, known as OPEC+, have announced plans to increase oil production, starting in December 2024.

Barclays analyst Amarpreet Singh noted that the fundamentals appear to be moving in the opposite direction to the recent escalating tensions, with Iranian crude oil exports at their highest level in years. This suggests a very low likelihood of a serious disruption to global oil supplies.

Tom Kloza, Global Head of Energy Analysis at Oil Price Information Service, estimates that oil prices are approaching a peak. He says Brent crude could very quickly reach $80 a barrel, or slightly higher. However, in the long term, the price outlook is downward.

He explained that once things calm down, oil traders will focus on 2025. This will be a very difficult year for world crude oil, as supply will almost certainly exceed demand by 500,000 to 1 million barrels per day.

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