Hi,
For people directly affected by the conflict in the Middle East there are way more important things to consider than the prices of oil and gas. But the truth is, along with the size of Iran’s drone and missile stockpiles, they will likely be key factors in how long this war lasts.
The United States might be the world’s biggest oil producer but it’s not immune from the surge in crude prices caused by disruptions to supply and output in the energy-rich Middle East. Oil is an international market and with Brent now over $83 a barrel, U.S. consumers are starting to feel the squeeze.
Gasoline prices in the U.S. have risen to $3.20 a gallon, a jump of about 20 cents this week, according to data from AAA. Diesel prices, meanwhile, jumped 14.7 cents from Tuesday to hit $4.04 a gallon, the first time in nearly two years and the biggest daily increase since March 2022, when Russia's invasion of Ukraine upended global oil markets.
While consumers focus on the prices at the pump, the jump in diesel costs could reverberate through the U.S. economy, raising prices for all sorts of products, including food, if farmers have to reduce plantings and transportation costs jump.
That’s a major risk to U.S. President Donald Trump and his Republican Party ahead of midterm elections in November. Inflation is set to be a key concern of voters, with many across the country struggling to keep up with rising costs. A sharp selloff in government bonds underlines the concerns about inflation if higher energy prices persist. You can hear more on this week’s episode of Reuters Econ World podcast, which is all about the fallout for the global economy from the conflict. Listen here.
And the inflationary pressure can come on multiple fronts. Silicon Valley is already facing rising costs for memory chips, which are crucial for building out data centers as well as smartphones, laptops and cars. The energy crunch emanating from the Middle East could exacerbate that. South Korea, the biggest supplier of memory chips, is reliant on the region for its oil and gas, as well as key chip inputs like helium.
Indeed, Asian countries such as South Korea, Japan, India and China are heavily reliant on the Middle East for their energy needs – a fact reflected in the much steeper drop in Asian stock prices compared to U.S. indices since the war started last weekend.
How bad things get economically all depends on how long hostilities last. Reuters reporting suggests that Iran could disrupt the Strait of Hormuz, through which 20% of the world’s oil and gas transits, for months using drones.
But even if the conflict ended tomorrow, it would take weeks for supplies to return to normal. A Reuters exclusive this week showed that it would take Qatar, which supplies 20% of the world’s liquefied natural gas, at least a month to return to normal production volumes after it halted output this week.
Europe’s stores of gas have been vastly depleted after a particularly harsh winter and buyers in Europe need to find the equivalent of around 700 cargoes of liquefied natural gas just to fill storage this summer, according to analysts at Kpler, about 180 cargoes more than last year.
With benchmark gas prices up nearly 50% this week, Europe's bill for those extra 180 cargoes had increased to about $10 billion from $6.7 billion last Friday, according to Reuters calculations. For the full summer refill, the price has risen by nearly $14 billion to $40 billion.
Whatever the immediate price hit, investors are betting that the conflict and energy supply hiatus in the region will be limited and allow normalization of pricing through the summer. As my colleague Mike Dolan points out in a column, the futures curve for Brent crude oil, for example, sees prices drop more than $10 per barrel again by year-end - back to pre-attack prices. Natural gas futures see prices stay higher for longer – pricing year-end rates about $10 higher than they were a month ago. But the gap closes within a year.
We can only wait and see.
As always, I'd love to hear from you by hitting reply on this email or finding me on LinkedIn.
