Oil prices could climb higher if Mideast tensions escalate

Miami Herald

14 hours ago

Oil prices, which surged after Israel attacked Iran early Friday, could stay high as long as tensions are elevated in the Middle East.
Higher oil prices may eventually lead to more expensive gasoline and diesel, hurting consumers and businesses, and throwing a wrench into the Trump administration's goal of lowering energy costs to keep inflation in check.
The benchmark U.S. crude oil price settled at $72.98 a barrel Friday afternoon, up 7%. Prices briefly topped $77 a barrel shortly after the attack began.
Where oil prices go from here depends on how Iran responds to the Israeli attacks, analysts said. Prices could climb further if Iran attacks energy infrastructure or U.S. bases in the region. But if it retaliates in a more limited fashion, oil prices are likely to fall in the coming weeks.
Iran launched missiles at Israel on Friday night, some of which struck parts of Tel Aviv. The extent of the damage was not immediately clear.
Either way, U.S. oil companies and big producers in the Middle East like Saudi Arabia are not likely to ramp up production quickly, said Robert McNally, an energy adviser under George W. Bush's administration who is now president of Rapidan Energy Group, a research firm in Washington.
Producers know that although geopolitical conflicts often drive up prices in the short-term, which is good for them, the fighting can ultimately lead to recessions, which push oil demand down, McNally said. Saudi Arabia and other members of the oil cartel known as OPEC+ will also not want to be seen as supporting or benefiting from Israel's attack.
'They're going to hunker down, stay low and hope it blows over,' McNally said of OPEC+.
Iran produces around 3% of the world's oil but could disrupt far more of it. That is partly because the country sits on the northern side of the Strait of Hormuz, a key shipping route that connects the Persian Gulf and the Gulf of Oman.
Around a fifth of the world's oil and related fuels moves through the strait every day. And while it would be difficult for Iran to close that waterway for a long time, it could disrupt traffic, RBC Capital Markets analysts wrote Friday.
In past periods of heightened political tensions, Iran has seized tankers or interfered with their GPS signals, making it more difficult to navigate the waterway, according to Rystad Energy, a research and consulting firm.
That said, Iran has a financial incentive to keep the Strait of Hormuz open because nearly all of its oil exports pass through it. Any interference there could also hurt China, which is the biggest buyer of Iranian oil and relies heavily on energy shipped through the strait.
Any disruptions would also affect the United States. While the country depends far less on oil from the Persian Gulf than it used to, many Americans are vulnerable to a big increase in oil prices.
The economic and political ramifications of a big jump in energy prices are not lost on President Donald Trump. He was lamenting a recent, more modest price increase before Israel attacked Iran.
'I don't like that the oil prices have gone up just a little bit over the last few days,' Trump said at a White House event Thursday.
He chided the energy secretary, Chris Wright, who was in the audience: 'I was going to call and just really start screaming at you. Are we OK? Nothing wrong, right? It's going to keep going down a little bit, right? Because we have inflation under control perfectly.'
Oil prices remain moderate by historical standards. U.S. oil prices have averaged above $76 a barrel in each of the last three years, according to the Energy Information Administration. They have traded closer to $60 a barrel since early April, when Trump announced plans to place tariffs on nearly all U.S. trading partners.
That stoked fears that an all-out trade war could cause a global economic slowdown -- and possibly tip the United States into a recession. Oil prices recovered somewhat after the Trump administration said it would keep many tariffs at a lower level temporarily to give the United States time to negotiate trade deals with other countries.
Even so, many domestic oil producers have started to pull back, as some companies cannot make money drilling new wells at prices of $60 a barrel or less. If oil remains above $70 a barrel for a while, however, U.S. producers' plans could change again.
Gasoline is now about 9% cheaper than it was a year ago, according to the AAA motor club. A gallon of regular gasoline costs $3.13 on average.
Other energy costs are rising, however, including for electricity to power homes. Several studies have found that Trump's domestic policy bill, as it was passed by the House last month, would make things worse.
Should oil get 'caught in the crossfire,' RBC analysts wrote, Trump would most likely ask Saudi Arabia and others to pump more to insulate U.S. consumers from the effects of the conflict.
This article originally appeared in The New York Times.
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