Will the ceasefire hold between Israel and Iran? Was Iran’s missile attack on the U.S. base in Qatar the only retaliatory measure it will take against the United States following the bombing of its three nuclear sites?
Answers to those questions could determine how much we pay in every U.S. store—not just at the pump, according to a set of new reports. One model even suggests the inflation rate could more than double by the end of the year with a big enough increase in oil prices.
Crude oil traders appear cautiously optimistic, though. Futures prices at 12 p.m. ET Thursday for a barrel of oil were $65.88—lower than they were when Israel first attacked Iran on June 12. They’re about $8 lower than when tensions were at their highest.
President Donald Trump and others in his administration say they’ve ended the Israel-Iran war by dropping the huge bunker-busting bombs, but two papers this week from Oxford Economics still call the situation in the Middle East “fluid” and warn about what could happen if Iran decides to disrupt shipping in the Strait of Hormuz.
Iran’s Supreme Leader Ayatollah Ali Khamenei added to the uncertainty Thursday when he warned any future attacks against Iran would come at a great cost.
Oil prices tumble from June 20 highs
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Oxford Economics says its unlikely Iran would completely shutdown the Strait of Hormuz because they might not have the capabilities, or U.S. military would likely intervene. Iran also wouldn’t likely have an interest in disrupting all oil shipping, considering more than 80% of the crude in the strait is generally bound for Asia.
Where is the Strait of Hormuz
How Iran could slow shipping through the Strait of Hormuz
Iran could stop short of shutting down the Strait of Hormuz and still disrupt world economies. It might decide to make shipping in the Strait of Hormuz riskier and more expensive—largely because of higher insurance costs—by using various methods to harass and slow ships moving through the strait, according to Oxford Economics:
◾ Deploy mines
◾ Attack ships with drones and missiles
◾ Jam GPS signals
The effectiveness any of these disruptions would have varying impact on prices in world oil markets. Recent history shows that the larger the rise in oil prices at the start of a conflict, the longer it typically takes for them to return to previous levels.
How oil prices changed following in previous incidents
How gas prices followed oil prices after Russia invaded Ukraine
Not unsurprisingly, higher oil prices drive up fuel prices. It’s rarely a one-to-one change, though, because of the additional costs—refining, taxes and distribution among them—by the time gasoline reaches the pump. When Russia invaded Ukraine, already inflated oil prices drove up U.S. gas prices and helped drive higher inflation throughout the economy.
How a short-term, oil-price spike might affect inflation in the U.S.
Oxford Economics modeled what might happen if Iran were able to slow about 70% of shipping traffic in the Strait of Hormuz and raise world oil prices by 25%. Their model showed that the annual inflation rate—which was 2.4% in May as measured by the consumer price index—could rise as high as 5.5% by the end of the year.
In the same scenario, Oxford Economics projected the unemployment rate to rise from 4.2% in May to 4.5%, which could spur the Federal Reserve to start cutting interest rates to slow job losses—despite the higher prices driven by higher oil prices.
