How worried should I be about rising oil prices?

Rising oil prices are being closely watched as the conflict spreads across the Middle East.

Oil prices affect everything from the price of food at the supermarket to how much it costs to fill up your car.

Crude oil prices rose nearly 10% to around $78 a barrel this week as the conflict intensified.

That may seem like a big jump, but crude oil prices have been volatile, and after Russia's invasion of Ukraine, benchmark Brent crude hit around $130 a barrel.

The improvement comes as many countries, including the UK, begin to recover from a 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 petrol and diesel, meaning higher oil prices can raise prices at the pumps when they've just hit them. Minimum level for three years.

If a company supplying goods, such as food, is affected by higher fuel costs, it is likely to raise prices as well. These increased costs can be passed on by supermarkets selling food to us, the consumers. Cost of living increases.

Callum McPherson, Investec's head of commodities, told the BBC: “Everything we go to the shop and buy is transported around and made from things that have been transported around. Everything gets filtered through the rise in fuel costs.”

Bank of England Governor Andrew Bailey, who sets interest rates, warned that the Middle East conflict could have a “very serious” impact on the UK.

Mr. Bailey said he Watching developments “very closely”. It comes as he signaled interest rates are on the way down, and the UK's outlook on inflation – which has fallen in 2022 after being driven by higher oil and gas prices – looks bright.

So far the rise to around $78 per barrel is not alarming time.

Carolyn Bain, chief commodity economist at Capital Economics, said if the “worst-case scenario” of further growth doesn't materialize, oil prices “could bounce back pretty quickly.”

Iran is the world's seventh largest oil exporter, with half of its exports going to China. China may turn to Russia if supply is disrupted.

But Ms Bain warned that the markets were “delicately balanced” and if the conflict continued to escalate, “the removal of a medium-sized supplier like Iran would drive up prices”.

He said there was “more than enough capacity” globally to cover the gap if Iranian production were lost, but there were questions about where Saudi Arabia's “loyalty would be” as the world's second-largest oil producer and whether it would increase or limit output. manufacturing

Mr McPherson said if Israel decided to attack Iran's oil sector, a rise in the price of Brent crude could increase the cost of filling the pump “quite quickly”.

He explained that this scenario could threaten general inflation in the UK, which could affect any decision by the Bank of England to cut interest rates.

However, he also noted that “ultimately there may not be any supply disruption”.

The direct impact on Iran's oil production is not the only concern.

There is a risk that any increase in the region could block the Strait of Hormuz, a relatively narrow channel through which a large amount of oil tanker traffic passes – about a third of all oil traded at sea.

It is the route through which a fifth of liquefied natural gas (LNG) is transported, a commodity on which the world has become increasingly dependent since Russia imposed sanctions following its invasion of Ukraine.

Asia is the most physically dependent on oil and gas flows from the Persian Gulf, and the immediate impact of an increase would be significant.

Disruption to LNG shipments from one of the world's biggest exporters to Qatar would raise gas prices – which could lead to higher household gas and electricity bills. Like oil, gas prices filter down the supply chain, affecting the prices of virtually all commodities.

UK energy bills are up 10% for this winter, but are currently forecast to drop slightly in January. This forecast may change, of course, if an escalation of conflict in the Middle East affects global gas supplies and leads to higher prices.

But Ms Bain said the risk of a collision blocking the strait was low.

And if it does convert, Mr McPherson adds the impact on the UK will be minimal, as most of Europe's gas is supplied mainly from Norway.

There are many possible outcomes, but in terms of what will happen to oil prices in the coming weeks and months, “nobody knows”, Mr McPherson admits.

There is a “broad spectrum” of what could happen next, he added, but “there's no way to tell where we'll be this time next week”.