The future stability of the unofficial ceasefire between Israel and Iran currently hangs in the balance. The singular missile strike by Iran on the United States base in Qatar, conducted as retaliation against the US after the bombing of three Iranian nuclear sites, also casts further uncertainty on the future dynamics of the conflict. Uncertainty around these significant issues might heavily influence consumer prices across the U.S., as demonstrated in recently released reports. In one startling prediction, a significant surge in oil prices could provoke an inflation rate increase, potentially more than doubling it by year’s end.
Those who trade in crude oil are maintaining a measured optimism in view of these circumstances. Oil futures prices midday on Thursday stood at $65.88 per barrel, reflecting a reduction compared to when Israel initiated its assault on Iran on June 12. In fact, these prices are around $8 lower than during peak tensions. Nevertheless, the United States government’s assertion that the Israel-Iran conflict has been successfully resolved through the deployment of massive bunker-buster bombs is met with skepticism by economic analysts.
Two studies published by Oxford Economics describe the current status across the Middle East as highly fluid and unpredictable. These insights alert to potential consequences in the event Iran opt to interfere with shipping across the critical Strait of Hormuz. The central issue, hinging largely on the future decisions of Iran, pertains to the fact that any future assaults on Iran come at a steep cost, a notion recently reinforced by Iran’s Supreme Leader Ayatollah Ali Khamenei.
Oxford Economics envisages it improbable that Iran will instigate a full shutdown of the Strait of Hormuz, primarily because their capability may be constrained, or due to probable intervention from the U.S. military. The possibility that Iran might seek disruption of all oil transport via the strait also remains doubtful given that more than 80% of the crude oil traveling through the strait is typically Asia-bound.
Nevertheless, the potential remains for Iran to enact a significant disruption to the global economy, even without a complete shutdown of the Strait of Hormuz. For instance, they could heighten the risk and associated costs of shipping in the Strait of Hormuz, primarily due to increased insurance expenses. There are multiple ways by which they could achieve such slowed and more precarious transits, such as deploying sea mines, drone and missile attacks on ships, or GPS jamming.
The extent of any disruption would clearly relate directly to the impact on global oil prices. As demonstrated in recent history, a sharp initial rise in oil prices due to a conflict usually means a longer timeline for a return to normality. Predictably, an increase in the price of oil eventually triggers a rise in fuel costs, amplifying consumer financial burden.
However, this isn’t necessarily a linear relationship given the involvement of other factors. When gasoline finally reaches consumers, the price includes many costs incurred along the way, including refining, taxes, and distribution. This complex price buildup means that a one-to-one change is unusual.
An interesting scenario was constructed by Oxford Economics to model the potential outcomes if Iran were to successfully slow approximately 70% of the shipping traffic in the Strait of Hormuz, precipitating a 25% increase in world oil prices. According to their simulation, such a sequence of events could dangerously spike the annual inflation rate, which stood at 2.4% in May, to an alarming 5.5% by the end of the year.
Using the same assumptions, Oxford Economics also forecasted a corresponding rise in the unemployment rate from May’s 4.2% to 4.5%. The Federal Reserve could potentially react to such a scenario by reducing interest rates in an attempt to stall further job losses. On the contrary, this could happen concurrently with soaring prices that are driven by escalating oil prices.
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