The global economy is not as exposed to higher oil prices as it was in the 1970s, when events in the Middle East twice tipped the world into recession. But the latest increase in oil – and gas – prices is still a threat to the global economy and particularly to a small energy importing economy like Ireland.
Financial markets are, as ever, trying to anticipate what comes next. The immediate impact of higher energy costs is clear enough; prices to consumers and businesses rise and there is a knock-on impact as this spreads through the economy. To complicate matters further, the conflict has sent sea freight rates to record levels and supply chains face some disruption.
However, in judging how serious this energy crisis might become, a great deal depends on how far the conflict spreads and, crucially, how long it lasts. This will determine the level of disruption to global oil and gas supplies and the extent of wider consequences to shipping, travel and international confidence.
Risks of a drawn-out conflict had unnerved markets, with significant upheaval early on Monday. This was calmed to an extent by signals that major countries are willing to release oil from their reserves, adding to supply. Later it emerged that they would not yet do this in a coordinated fashion, but “stand ready” to act.
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But potentially more significant news came later, when US president Donald Trump told CBS that the war was “very complete, pretty much” and that the US was ahead of schedule. The comments led energy prices to fall sharply lower, with oil falling back below $90 a barrel in a day of extraordinary volatility. What happens today will depend on the interpretation of the president’s comments, which appear to run counter to some other recent statements.
A lot is at stake, principally for the region and its people. But the economic implications are also significant. Iran’s tactics seem to be to do whatever is possible to hit energy supplies and thus put pressure on the US and western economies.
The resulting surge in energy prices and disruption to transport and travel had started to undermine market confidence and has led to serious concerns in governments worldwide. Many had started to consider policy responses to limit the economic damage ;.
A period of uncertainty lies ahead – and this will itself have a cost in terms of investment and hiring decisions put on hold. Energy prices had reached a level which would cause economic problems . The European Commission said that if prices had remained at high levels for a couple of months a period of “ stagflation” – high inflation and low growth – was in prospect.
Now it remains to be seen if last night’s decline can hold. There may well be more turns yet to come in this unpredictable and worrying conflict.
