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The conflict between Israel and Iran could escalate and if this grim scenario becomes a reality, the crude oil price will not be unaffected. While a war between these two countries is not imminent, the recent warnings reiterated by Israel’s Prime Minister and the adamant attitude of Iranian officials keep this issue actual.

There are several ways in which action could unfold and the real question is not whether the price of crude oil will go up, but rather how quickly the costs will rise.

Guest post by Martin K. of

Don’t be overconfident in excess capacity

Crude oil prices are as high as $94 per barrel and with the conflict between Iran and Israel continuing, it is very likely that this trend will continue. Even if the war doesn’t begin, the existing tensions with cause the price to inch closer to the $100 mark, but things could turn from bad to worse if Israel launches a preemptive strike. Everyone hopes that if Iran’s exports are affected, Saudi Arabia and other OPEC members will boost output and compensate the shortfall in supplies.

This is merely wishful thinking, because the excess capacity has been almost exhausted and not even Saudi Arabia will be able to produce more than an additional 1.5 million barrels per day. Add to this the fact that this country relies on the Strait of Hormuz to export oil and it becomes clear that we have another reason to expect prices to go up. Unless the United States succeeds in keeping the strait open and safe, crude oil prices will soar and seemingly incredible values of $200 per barrel are possible.

The International Energy Agency’s contribution

With the excess capacity being unreliable, consumers shouldn’t assume that the International Energy Agency will be capable of offsetting the loss. Its 1.5 billion barrels will be released gradually to prevent the crude oil prices from soaring, but this is rather a short-term solution. The prices will still climb as high as $150 per barrel, and will gradually fall after the conflict is over but it is reasonable to expect backend buying. This means that replenishing the stock will ultimately trigger another increase in the price, but the amounts will depend on the conflict’s duration and effects.

One of the few scenarios in which the crude oil price will revolve around of value slightly higher than $100 after the conflict ends, is the one involving a significant disruption in Iranian exports. Neither Saudi Arabia nor IEA will be capable of offsetting this loss and if the conflict lasts long enough, the global economy will slow down. After the war ends the demand will be lower and as a result the prices will not jump as high, but this is hardly a desirable outcome.