Oil prices are a key economic indicator, and when they rise sharply, it can affect everything from consumer spending to corporate profits and inflation.
Here are some of the key geopolitical factors at play:
• The main story is still that the Strait of Hormuz, through which roughly one-third of global oil shipments normally pass, has been effectively closed since the U.S.-Iran conflict began in late February. In addition, Iran-backed Houthi forces out of Yemen have threatened another major waterway, the Bab al-Mandeb Strait, out of the Red Sea.
• More recently, Saudi Arabia’s East-West Pipeline was attacked by Iranian drones, forcing a precautionary closure. The pipeline carries up to 7 million barrels per day, and repairs to pumping stations have been estimated to take weeks, although U.S. and Saudi officials are hoping it could be back up and running in days.
• The IEA estimates global oil production fell by 1.6 million barrels per day in August, with over 10 million barrels per day of Gulf production shut down, according to a recent report. The U.S. continues to be an important producer of oil, which has helped to stabilize prices relative to past episodes. However, the U.S. is not completely insulated since it still imports crude oil for different purposes.
• These geopolitical events have made oil extremely volatile this year. Still, oil prices did improve for a period even as regional conflicts raged on. For instance, prices fell to around $70 per barrel in July even as the war was continuing. So, it's important to maintain a longer-term perspective when it comes to oil price moves.
• For consumers, higher oil prices have continued to raise inflation risks. The latest Consumer Price Index report for August showed that consumer energy costs rose 16.3% over the past year, with much of this driven by gasoline prices rising 27.4%. One measure of "supercore" inflation, which excludes food, energy, and shelter, rose only 2% year-over-year. This means that underlying inflation is still steady, while headline inflation is largely driven by energy costs.
While geopolitical events like this can create short-term volatility, history shows that markets and economies tend to adapt over time.
