How the Iran conflict could cause widespread economic shock

Mobile phone footage shows flames and black smoke rising from a ship in the sea Strait of Hormuz A grim picture shows fears of disruption to world oil supplies amid the US-Israel conflict with Iran.

The strait is an important international trade route for oil and liquefied natural gas (LNG). The Skylight, a 7,600-tonne oil and chemical tanker, was north of the Omani port of Khasab, near the narrowest point of the strait, where the shipping lane is only 3 kilometers wide.

It was one of three civilian vessels reportedly shot down in the region on March 1 — while the US Central Command said it hit an Iranian naval vessel nearby.

During the unrest, a Reuters analysis of data from the maritime traffic website said at least 150 ships, including many oil and gas tankers, dropped anchor. As it appears to have stopped shipping, there are conflicting reports about whether Iran has declared the strait closed.

“We see the strait opening. But what’s stopping ships and why IOCs (international oil companies) are avoiding using the strait is because of insurance,” Amna Bakr, head of Middle East and OPEC+ research at trade intelligence firm Kpler, said during a March 1 webinar.

“Insurance costs are so high that no ship can afford to risk crossing the strait at this time,” she added. “The moment the market just gets that headline you know — the strait is closed, there’s no more crude oil flowing and so on — that’s when the panic sets in.”

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For now, it hasn’t. However, global benchmark Brent crude oil prices were reported to be up 10 percent on March 1 and many analysts expect prices to rise further.

“We expect prices to move closer to $100 a barrel (after the weekend) and maybe break above that level if we see a long-term shutdown,” Ajay Parmar, head of energy and refining at ICIS, told Reuters.

Booker took a more conservative line but said the impact of this war on international oil prices would be far greater than a 12-day conflict with Iran in June 2025.

“During that conflict, the price of oil went up to $80 and then it kind of went down. Now, it’s a less organized conflict. The other one … was almost a show. You had fireworks, you warned other countries that they were going to strike ahead of time,” she said.

Speaking from Dubai, which Bakr said was in a state of shock due to the “unprecedented” Iranian attacks, she added: “Now we are not getting these warnings. So we are in a completely different zone. I expect oil prices to be between $85 and $90.”

High oil prices can cause widespread economic shocks, inflation and intense political tensions in many countries.

There are several ways that a conflict with Iran could cause prices to rise. Iran’s oil is heavily embargoed, but the country still sells a lot of oil to China, for example. If these supplies are cut off during a protracted war, China will need to look elsewhere.

Meanwhile, reports of possible Iranian drone or missile strikes have caused oil fields in Iraq to shut down production as a precautionary measure.

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If the Strait of Hormuz is closed, oil exports from Kuwait and other Persian Gulf countries will also be affected. Alternative export routes exist, using pipelines across the Saudi Arabian desert, but capacity is limited.

Barrels per day hedge potential price risks. This group includes eight countries: Saudi Arabia, Russia, Iraq, United Arab Emirates, Kuwait, Kazakhstan, Algeria and Oman.

“Countries will continue to closely monitor and assess market conditions, and … reaffirmed the importance of adopting a cautious approach,” they said in a statement.

The statement did not mention the conflict with Iran. But the Russian Foreign Ministry warned in a separate statement that blocking shipping in the Strait of Hormuz could “create a significant imbalance in the international oil and gas markets.”

In fact, this is an insecurity that Russia can take advantage of.

Globally low and heavy oil prices Russian oil embargo including the price cap imposed by the G7, has been hit hard. In February, a report by the Center for Research on Energy and Clean Air (CREA) said Russia’s revenue from crude oil exports fell 18 percent compared to last year.

One of Russia’s main customers is China. A drop in global oil supply means a welcome drop in Chinese orders from Iran or other Persian Gulf suppliers.

By RFE/RL

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