As the conflict in the Middle East spreads, rising oil prices are closely watched.
The cost of oil affects everything from the price of food at the supermarket to the price of filling up your car.
The price of crude oil rose nearly 10% this week to around $78 per barrel due to the intensifying conflict.
That may seem like a big jump, but the price of crude oil tends to be volatile, and following Russia's invasion of Ukraine, a barrel of benchmark Brent crude reached nearly $130.
The rise comes as many countries, including the UK, are just beginning to recover from the sharp rise in oil prices following the Covid pandemic and Russia's war in Ukraine. So how worried should we be?
Crude oil is a key ingredient in gasoline and diesel, meaning higher prices could push up prices at the pump after they just hit a three-year low.
If a company delivering goods, such as food, is hit by rising fuel costs, it is also likely to raise prices. These increased costs could then be passed on to the supermarkets that sell the food to us, the consumers. The cost of living is increasing.
“Everything we buy in the store has been transported and has been made from things that have been transported. Rising fuel costs tend to trickle down to everything,” said Callum Macpherson, raw materials manager at Investec, at the BBC.
Andrew Bailey, governor of the Bank of England, which sets interest rates, has warned that the conflict in the Middle East risks having a “very serious” impact on the UK.
Mr Bailey said he was monitoring developments “very closely”. It comes as he signaled that interest rates were on a downward path and the UK's inflation outlook – which has declined after being pushed higher by high oil prices and gas in 2022 – look brighter.
Yet so far, a rise to around $78 a barrel is not the time to sound the alarm.
If the “worst case scenario” of a new escalation does not materialize, oil prices should “retreat quite quickly,” said Caroline Bain, chief commodities economist at Capital Economics.
Iran is the world's seventh largest oil exporter, with half of its exports going to China. In the event of a supply disruption, China could turn to Russia.
But Ms Bain warns that markets are “finely balanced” and if the conflict escalates, “the withdrawal of a mid-sized supplier like Iran would cause prices to spike”.
She says there is “more than sufficient capacity” globally to make up the shortfall in the event of a loss of Iranian production, but the question arises as to where Saudi Arabia's “loyalty” will lie in as the world's second largest oil producer and whether it will expand or restrict further. production.
Mr Macpherson believes that if Israel decided to attack Iran's oil sector, a rise in the price of Brent crude could increase the cost of fueling at the pump “quite quickly”.
He explains that this scenario could threaten general inflation in the UK, which could in turn influence any decision by the Bank of England to cut interest rates.
However, he also points out that “there may ultimately be no interruption in supply.”
The direct impact of Iranian oil production is not the only concern.
There is a risk that any escalation in the region could block the Strait of Hormuz, a relatively narrow channel through which a huge amount of tanker traffic passes – around a third of the total oil transported by sea.
It is also the route by which a fifth of liquefied natural gas (LNG) is transported, a commodity on which the world has become more dependent since sanctions were imposed on Russia following its invasion of Ukraine.
Asia is physically dependent on the flow of oil and gas from the Persian Gulf, and the immediate impact of an escalation would be significant.
Disruption of LNG shipments from one of the world's largest exporters to Qatar would lead to higher gas prices, which could in turn lead to higher household gas and electricity bills. As with oil, gas prices ripple through supply chains, affecting the cost of virtually every good.
UK energy bills have risen by 10% for this winter, but are currently expected to fall slightly in January. This forecast could of course change course if an escalation of conflict in the Middle East affects global gas supplies and causes prices to rise.
But Ms Bain believes the risk of the strait being blocked due to the conflict is low.
And if that happened, Mr Macpherson adds the effect on the UK would be minimal, given that most of Europe's gas comes mainly from Norway.
There are many possible outcomes, but when it comes to what happens to oil prices in the coming weeks and months, “nobody knows,” Macpherson admits.
There's a “wide range” of what could happen next, he adds, but “there's really no way to say where we'll be this time next week.”
