How rising crude oil prices could impact the U.S. and global economy

Brent crude and West Texas Intermediate, the U.S. crude oil benchmark, have been trending up the last few days amid rising tensions in the Middle East.

So far this week there’s been a reported Iranian attack on oil tankers in the contested Strait of Hormuz, and new threats to Saudi oil refineries and pipelines by the Houthis, who also threaten an alternative sea route to get crude oil out to foreign markets. Plus, there are new reports the U.S. and Israel — after elections in both countries — are planning another military campaign against Iran.

As crude oil goes higher, there are alarming implications for both the U.S. economy and the global economy.

The IMF recently warned that the global economy faces heightened risk from rising crude oil prices, along with dwindling emergency stockpiles to buffer supply disruptions from the Middle East and Russia.

Now, it is true that more oil has been transiting the Strait of Hormuz lately, under U.S. naval protection. But there’s a catch.

“You’ll hear that flows from the Middle East are about where they were before the war started. But here’s the difference: you could move a cargo of crude oil for about $2 to $3 per barrel to China. Nowadays it costs $35 or $40,” said Tom Kloza, an energy advisor for Gulf Oil.

Over the past 8 months, the oil market has priced in a much higher level of risk to global energy supplies, said Suzanne Maloney, an Iran expert at the Brookings Institution.

She said it’s now assumed not only that this current level of exports will be disrupted “sporadically and unpredictably” by Iranian attacks, but another major U.S.-Israeli military operation against Iran could disrupt shipments through the Strait as well.

The U.S. is a major oil exporter, and thus less dependent on Middle East crude than Europe and Asia. But limited refinery capacity means we are still subject to supply and price shocks.

Kloza at Gulf Oil said a key Exxon refinery was just taken offline in Joliet, Illinois.

“The U.S. Great Lakes has gone bananas. You may see a lot of prices above $5 a gallon,” he said.

Nationwide, pump prices look likely to stay higher for longer now, said Gary Schlossberg at the Wells Fargo Investment Institute.

“It lifts inflation — top-line inflation — mainly centered on fuel. So that squeezes real incomes,” he said.

One big question going forward will be whether the inflationary effect starts to spread more widely through the economy, boosting prices of transportation, food, manufactured goods, and more.