Oil prices rose this week due to tensions in the economy Middle East escalated. Iran launched missiles at Israel and the Israelis threatened retaliation, raising the possibility of a disruption in the flow of oil from the region. A rise in oil prices automatically leads to fears of a spike in gas prices, but experts see reasons that may not happen.
Here’s a look at the current situation and outlook for oil and gas prices:
Oil prices rose this week by more than $6 per barrel (5.47 euros) and prices at the pump also rose. The average price for a liter of gas increased by 5 cents compared to last week. Any major escalation of tensions in the Middle East brings back memories of the oil embargo that followed the start of the Yom Kippur War in 1973, which caused oil prices to quadruple.
However, global oil supply has changed radically since the 1970s, with the US becoming the world’s largest oil producer. Months of war between Israel and Hamas and Hezbollah, two Iranian allies, have done little to boost prices for OPEC and its 12 oil-producing countries. Only the possibility of a direct confrontation between Israel and Iran was decisive.
U.S. gas prices tend to rise along with crude oil prices because oil makes up half the cost of a gallon of gasoline.
The national average for gas has risen to about $3.18 per gallon, according to AAA. But that’s still 13 cents less than a month ago and 60 cents less than a year ago. The national high of $5 per gallon was reached in June 2022.
“Despite the threat of war and hurricane season still ongoing, domestic gasoline prices are declining,” AAA spokesman Andrew Gross said in a statement Thursday. “There are now 18 states east of the Rockies with averages below $3 per gallon.”
AAA also estimates that approximately 1.2 million of its members live in households with one or more electric vehicles. The organization believes that tepid gas demand and low oil costs are likely to push down prices at gas pumps.
The long-term expectation is that oil prices will go lower, not higher. This is because the balance between supply and demand has shifted towards supply, a dynamic that generally weighs on oil prices.
In its latest update on energy markets, the International Energy Agency said oil demand rose by the smallest amount since 2020 in the first half of this year. Meanwhile, supply has continued to increase and OPEC+ alliancemade up of members of the producer cartel and allied countries including Russia, has said it plans to release more oil to the market from December.
“Geopolitical tensions have soared recently and yet fundamentals appear to be moving in the opposite direction, with Iranian oil exports near multi-year highs,” Barclays analyst Amarpreet Singh said in a note to clients . “The jury is out on the root cause of the geopolitical drift, but caution is needed in taking a strong stance on any ongoing disruption.”
The country produces 3.99 million barrels per day, which is 4% of the world total. By comparison, Saudi Arabia produces about 9 million barrels per day.
Despite Western-imposed sanctions that have hampered production and export levels, Iran continues to find ways to sustain its oil sector, sometimes using creative methods such as blending and relabeling oil for sale to markets like China. By mid-year, Iran was exporting about 2 million barrels of oil per day, up from 500,000 in 2020 but down from the 2.5 million barrels it exported each day in 2018.
Export terminals such as Kharg Island in the Persian Gulf could be a target for an Israeli attack. They play a key role in shipping crude oil abroad, mainly to Asian countries, including China.
Oil prices rose on Thursday after President Joe Biden said US and Israeli officials discussed a possible Israeli attack on Iranian oil facilities. On Friday, Biden said the exact nature of any retaliation by Israel was “up for debate.” But he added: “I think if I were in their shoes, I would think of other alternatives than attacking oil fields.”
Tom Kloza, global head of energy analysis at the Oil Price Information Service, believes oil prices are nearing a top, with U.S. crude at $74.38 and Brent crude, the international benchmark, at $78.05. “Maybe Brent is drinking a cup of coffee at $80 a barrel or more,” he wrote in an email, but the long-term outlook is lower prices.
“Once things settle down, oil traders will focus on 2025 and 2025 looks very problematic in terms of high prices, with supply almost certainly exceeding demand by 500,000 to 1 million barrels per day,” Kloza said.