As oil prices hover above $100 per barrel amid the ongoing Middle East conflict and the effective closure of the Strait of Hormuz, sustained high prices could trigger a $500 billion shock to the global economy, an expert said . Following the start of joint US and Israeli military strikes on Iran on Feb. 28, and Tehran’s retaliations, the Middle East conflict has entered its third week with the Strait of Hormuz effectively closed to commercial vessels linked to the two attacking countries.
The near-complete halt of oil and petroleum traffic in the vital waterway, which typically handles 20% of the global oil demand with 20 million barrels transiting each day, has raised supply concerns in oil markets and sent prices soaring. The International Energy Agency (IEA) estimates that around 10 million barrels of oil per day will be removed starting in March due to the reduced supply in the Gulf, marking the largest supply disruption in global oil market history.
Brent crude closed Feb. 27 at $73.01 per barrel, just a day before the attacks began, but then rose as high as $114.3 per barrel during the ongoing attacks, reaching its highest level since June 29, 2022. Brent crude is currently hovering just below $100 per barrel amid a volatile trajectory driven by various regional reports. Oil supply constraints are causing major disruptions in global supply chains, while sharply rising prices are fueling inflationary pressures and threatening economic growth.
Fitch Ratings estimates stable growth of 2.6% for the global economy this year if oil prices do not remain elevated, but warns that sustained $100-level prices come with the risk of a significant global supply disruption. Brian Coulton, a chief economist at Fitch Ratings, told Anadolu that if high oil prices and supply constraints persist for an extended period, inflation could spike and growth could decline significantly.
Coulton said Fitch’s baseline scenario assumes the oil price hike will be short-lived, but global gross domestic product (GDP) growth could be 0.5 percentage points lower by the end of the fourth quarter if high prices persist, triggering a $500 billion shock to the global economy. However, the impact of the current Middle East conflict is expected to be mostly temporary, as Coulton said prices could drop rapidly if the Strait of Hormuz reopens, as the oil market prior to the conflict had run a supply surplus.
He added that the Gulf region is a major supplier of many inputs for food, chemicals, and other manufacturing sectors, as well as in energy, which is why the current conflict affects a wide range of commodity prices. ING Think recently reported that energy markets are continue to estimate the possibility of a longer oil and gas flow disruption through the Strait of Hormuz, seeing few signs that tensions could ease and that the flow of oil and liquefied natural gas (LNG) could resume via the vital chokepoint.
David Butter, a Middle East and North Africa analyst at Chatham House, said in a recent analysis that Gulf producers, heavily reliant on oil and gas are facing high costs due to declining revenues, while regional importers are pressured by rising fuel costs and losses in foreign exchange earnings. Qatar is estimated to face losses of at least $4 billion due to a one-month disruption in LNG exports, following the halting of production at its facility due to Tehran’s retaliation.
Iraq’s crude oil exports account for around 90% of budget revenues, and the Gulf’s most oil-dependent economy transports its oil via the Basra Oil Terminal through the Gulf and the Strait of Hormuz. Prolonged revenue losses could render it difficult to fund public sector salaries and pensions, which make up over half of Iraq’s spending budget.
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