Wider Middle East war could spike oil prices and rekindle US inflation, experts say

(WASHINGTON) — Israel escalated its war against Hezbollah this week with a campaign of deadly airstrikes that stoked concern about the potential for a wider conflict in the Middle East.

Since Monday, Israeli airstrikes have killed more than 550 people and injured about 1,850 people in Lebanon, according to the latest data from the Lebanese Ministry of Public Health. In response, thousands of people have fled their homes in Southern Lebanon, officials said.

A potential escalation of war in the Middle East could cause a dramatic rise in oil prices and rekindle U.S. inflation, triggering price increases for a range of essential goods from gasoline to plastic, analysts told ABC News.

While supply chain disruptions have not materialized as some analysts had feared earlier in the war, a spike in oil prices would carry significant implications for the U.S. economy, they said.

Oil prices surged about 1.5% in early trading on Tuesday partly due to concern about such a scenario. Overall, oil prices have climbed more than 8% over the past two weeks as conflict in the region has intensified.

The price of oil still stands well below a 2022 peak reached when the blazing-hot economic rebound from the pandemic collided with a supply shortage imposed by the Russia-Ukraine war. Gas prices, meanwhile, have plummeted in recent months.

The reemergence of sky-high oil and gas prices, however, could result from continued escalation in the Middle East, experts said.

“The biggest concern would be a sharp escalation in crude oil prices,” Jason Miller, a professor of supply-chain management at Michigan State University, told ABC News.

“That would filter through not only into higher gasoline prices but since petroleum is a direct input for just about every manufacturing operation, it would bring another inflationary shock,” Miller added.

In the event, for example, of a potential outcome that puts Israel in direct conflict with Iran, a major oil producer, the resulting price shock would make it more expensive to operate factories and transport goods. A wide array of consumer prices, in turn, would jump.

While sanctions have constrained Iranian oil output in recent years, the nation remains an oil producer and asserts control over the passage of tankers through the Strait of Hormuz, a trading route that facilitates the transport of about 15% of global oil supply.

“If Iran got involved in this war, then it would disrupt oil supply worldwide,” Christopher Tang, a professor at the UCLA Anderson School of Management, told ABC News. “Let’s hope that doesn’t happen.”

Iran allegedly funds the terrorist group Hamas that carried out a surprise attack on Israel last October, leaving 1,200 people dead and taking 250 people hostage. Iran has denied involvement in the Oct. 7 attack. Israel and the U.S. have both said that they do not have any hard evidence of a direct Iranian role in the attack.

In Gaza, more than 40,000 people have died and 92,000 have been injured amid a months-long Israeli military response, according to the Hamas-run Gaza Ministry of Health

Some experts said the economic damage caused by a potential spike in oil prices would be mitigated by two recent trends: rising U.S. oil production and sluggish global demand.

The U.S. set a record for crude oil production in 2023, averaging 12.9 million barrels per day, according to the U.S. Energy Information Administration, a federal agency.

The surge in U.S. production would help limit the impact of a possible supply disruption, though oil prices are set on a global market, where a major supply shock could not be entirely accounted for with an increase in U.S. oil output.

“The impact on the U.S. would be a much more muted one than it would be for countries that are large oil importers,” Gian Maria Milesi-Ferretti, a senior fellow in economic studies at the Brookings Institution’s Hutchins Center for Fiscal and Monetary Policy, told ABC News.

Meanwhile, relatively weak economic performance in Europe and China has eased global demand for oil, some experts said.

The European Union’s gross domestic product is expected to grow by 1% in 2024, which marks a slowdown from previous years, the European Commission said in May. Chinese output slowed over three months ending in June when compared with the same period last year, the Chinese government said in July.

“We have a weak Chinese economy and a weak European economy — that’s pushing down demand for oil at the moment,” said Miller, of Michigan State University.

“Right now, from a supply standpoint there isn’t a concern. Unless the conflict gets so hot that you start seeing it push oil prices much higher,” Miller said.