Oil prices continued to surge today amid an escalation in fighting in the Middle East, as Brent crude—the global benchmark—climbed to $107 per barrel and West Texas Intermediate—the North American benchmark—to $102 for the first time in months.
The Daily Brief reached out to three CFR fellows closely watching the developments to better understand the significance. While it’s not the first time oil prices have passed the $100 threshold during the Iran war, nor the highest they’ve ever been, spiking prices due to renewed hostilities “could point to worse to come,” Vijay Vaitheeswaran told the Daily Brief.
Peter Harrell said President Donald Trump kept oil prices relatively in check during the war’s first months through multi-pronged measures. Those included reserve drawdowns, calming the market with claims the war would be short-lived, and providing U.S. Navy escorts to ships transiting the Strait of Hormuz while some oil reached market via pipeline to the Red Sea, Harrell explained.
But now, the president faces a tougher reality. The war seems likely to continue, stockpiles are depleted, and Iranian attacks on energy infrastructure are becoming “more successful.” To boot, the Houthis appear poised to control access to the Red Sea, Harrell said. Oil flows remain depressed as traffic through Hormuz is still far below pre-war levels, and the administration’s attempts to boost supplies elsewhere have failed to make up the shortfall.
“That's a long way of saying no, Trump does not have good options to deal with this price spike other than bringing the war to a close and getting Middle East flows back to normal,” Harrell told the Daily Brief.
Vaitheeswaran noted other issues at play. The International Energy Agency’s release of strategic stocks can’t continue indefinitely, he said, since the U.S. Strategic Petroleum Reserve alone is already “at precariously low levels.” U.S. refineries are nearly at capacity, which will likely keep pushing up the cost of products such as diesel—which hit a record high last week—and jet fuel, leading to higher prices for consumers. Finally, reductions in Chinese demand for oil helped keep the strain on limited supplies in check. But their demand is picking up again, Vaitheeswaran said.
“This conflict has come down to a question of pain tolerance,” added CFR’s Edward Fishman. “Is Trump willing to endure rising fuel prices and worsening inflation in an effort to grind down Tehran’s will? Iranian leaders are betting he isn’t.”
Trump appears aware of the stakes of rising oil prices. While addressing the Republican midterm convention Wednesday, the president acknowledged the Iran war had increased energy prices, though he again defended the war as necessary to foil Tehran’s nuclear ambitions.
The Daily Brief will bring you more on the war’s economic ripple effects and their implications as they develop. Stay tuned.
