As the world absorbs the prospect of an escalating conflict in the Middle East, the potential economic fallout is sowing increasing alarm. The worst fears center on a broadly debilitating development: a shock to the global oil supply.

Such a result, actively contemplated in world capitals, could yield surging prices for gasoline, fuel and other products made with petroleum like plastics, chemicals and fertilizer. It could discourage investment, hiring and business expansion, threatening many economies — particularly in Europe — with the risk of recession. The effects would be potent in nations that depend on imported oil, especially poor countries in Africa.

The possibility of this calamitous outcome has come into focus in recent days as Israel plots its response to the barrage of missiles that Iran unleashed last week. Some scenarios are seen as highly unlikely, yet still conceivable: An Israeli strike on Iranian oil installations might prompt Iran to target refineries in Saudi Arabia or the United Arab Emirates, both major oil producers. Iranian-supported Houthi rebels claimed credit for an attack on Saudi oil installations in 2019. The Trump administration subsequently pinned the blame on Iranian forces.

As it has done before, Iran might also threaten the passage of tankers through the Strait of Hormuz, the critical waterway that is the conduit for oil produced in the Persian Gulf, the source of nearly one-third of the world’s oil production. Such a move could entail conflict with U.S. naval ships stationed in the region.

That, too, is currently considered to be improbable. But the upheaval in the region in recent months has pushed out the parameters of possibility, rendering imaginable scenarios that were once dismissed as extreme.

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Other Targets Besides Iranian Oil

As Israel plots its next move, it has other targets besides Iranian oil installations. Iran would have reason for caution in crafting its own retaliation. Broadening the war to its Persian Gulf neighbors would invite a punishing response that could push Iran’s own economy — already bleak — to the brink of collapse.

Yet the risks of a broader conflict have heightened in recent days as Israel has expanded its military campaign against its enemies to southern Lebanon, where it has targeted the Iranian-backed militant group Hezbollah. Iran’s strikes on Israel have raised the stakes further.

Visions of an intensifying war in the Middle East have added an enormous variable to a global economy already laced with unpredictable forces, from Russia’s war in Ukraine, to the trade conflict between the world’s two largest economies — the United States and China — and the ever-present risk of provocation from North Korea.

“This is an extraordinarily precarious global situation,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund who is now a professor at Harvard University. “The world is probably the most unstable that it’s been since the Cold War. That’s not even mildly an overstatement. It could get worse in a hurry. That would certainly have a big impact on the global economy.”

Every conflict in the Middle East holds the potential to jeopardize the world’s access to oil. This one appears no different.

Last Thursday, after President Joe Biden said his administration was “discussing” the possibility of supporting an Israeli strike on Iran’s oil facilities, oil prices spiked by more than 4%. The price of Brent crude, the international benchmark, breached $77 a barrel, up from about $71 a barrel before Iran unleashed missiles toward Israel.

The following day, Biden sought to alleviate concerns, telling reporters that the Israelis “should be thinking about other alternatives than striking oil fields.”

Experts assert that Israel’s efforts to limit the threat from Iran would be better served by targeting its military capabilities, perhaps firing on its elite Quds Force, which is widely unpopular within Iranian society.

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If Oil Production Attacked, There Would Be Minimal Global Ramifications

Even if Israel does attack Iran’s oil production, the ramifications of that alone would be minimal for the global economy, analysts say. Iran is a major oil producer, pumping out nearly 4 million barrels a day, or about 4% of the global total, according to the U.S. Energy Information Administration. But other Persian Gulf states like Saudi Arabia and the United Arab Emirates could expand production to make up that volume, easing pressures on international prices, experts say.

The key question is how Israel will respond to the Iranian missile attack, and what comes after. Iran appears to have strengthened ties with its Persian Gulf neighbors over the past year, diminishing the chance that it would pursue a broader regional conflict. But if that analysis proves wrong and Iran strikes refineries in the region or disrupts shipping, the world could be in for a considerable shock.

In a regional war involving Israel and Iran, oil prices would spike to $130 a barrel and the global economy would suffer a hit of 0.4%, according to an analysis by Oxford Economics.

That scenario would hit the global economy with a new source of rising prices just as central banks from the United States to Europe have been declaring victory over inflation in lowering interest rates. Lower rates spell easier credit terms for businesses and consumers, stoking anticipation of a spur to investing, hiring, homebuying and economic growth.

An oil shock could reverse that momentum. Oil prices are not merely a key metric in markets, but an elemental force influencing economic activity, policymaking and sentiments in virtually every nation. They largely determine the price of gasoline, which flashes from signs at gas stations, serving as a crude encapsulation of consumer confidence and economic well-being.

Unlike in the early 1970s, when concerted action by OPEC — the international cartel of oil exporters — choked off supply and sent prices soaring, the world today is far less susceptible to such shocks.

The United States has swelled into the leading oil producer, owing to its aggressive development of shale oil. Some economies have moved aggressively to expand production of wind, solar, geothermal and other renewable sources of energy, reducing dependence on oil.

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Global Demand for Energy Grows

The trouble is that global demand for energy has grown even faster, reinforcing the status of oil as a crucial commodity.

An oil supply crisis would reinforce the imperative for nations to diminish dependence on fossil fuels by expanding supplies of renewable energy. But that would not address the immediate economic threat.

The most wrenching consequence of an oil supply shock would be seen in lower-income countries contending with debt crises, including Zambia, Mozambique, Tanzania and Angola. Governments have slashed spending on public health, education and other services to avoid defaulting on debts. Higher costs for importing oil would worsen that problem.

Pressure would also fall on China, which purchases more than 90% of Iran oil exports and depends on imports for roughly three-fourths of its oil consumption.

The United States may be best positioned to absorb a shock. American companies engaged in fossil fuel production would benefit from a hit to the global supply of oil, reaping gains from higher prices. Yet the impact of slower global economic growth would hinder other American businesses, especially those that export.

Europe appears especially vulnerable to disruption. The continent has long relied on low-priced Russian energy. That supply was crimped after Russia invaded Ukraine, bringing international condemnation and sanctions. Russian President Vladimir Putin severely restricted the shipment of energy to Europe, forcing many countries to seek alternatives while limiting consumption. A sudden jolt in the price of oil would present another crisis.

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“What you would end up with in Europe is stagflation,” said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington, using a term coined in the 1970s to describe a persistent combination of rising prices and slower growth. “You likely get a recession and high inflation at the same time.”

The clearest beneficiary of higher oil prices would be Russia, Kirkegaard added, supplying Putin with greater wherewithal to redouble his military assault on Ukraine.

Greater oil revenues would also position Russia to lavish more aid on a key Middle Eastern ally: Iran. The Iranian government has looked to Putin to help provide the last elements needed to achieve the capability to produce nuclear weapons.

That reality, Kirkegaard suggested, may limit Israel’s willingness to risk greater escalation of the conflict. If Israel hits Iran hard enough to provoke an Iranian strike aimed at damaging regional energy production, that would increase the price of oil, effectively handing more money to Putin.

And that would increase the risk of a nuclear-armed Iran.

“If you’re Israel, why help the country that would help Iran reach the nuclear threshold?” Kirkegaard asked.

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This article originally appeared in The New York Times.

By Peter S. Goodman/David Guttenfelder
c. 2024 The New York Times Company