Whether the price of barrel is $ 60 or $ 100 is determined by political decisions taken in Riyadh, Moscow, Washington and now for the immediate future in Jerusalem and Tel Aviv.

For the moment it is too early to judge the consequences of Israel’s intensive bombing campaign directed at Iran’s nuclear capabilities and the individuals – scientists and leaders of the regime - who have been seeking to give Iran nuclear weapons.  The oil price rose on the news of the attack but only by 5 to 10 per cent.  No supplies have as yet been cut off and no oil production facilities have been attacked.  But the war is only a few days old and is worth considering what could happen next and the potential longer-term consequences for the market.

The Hormuz chokepoint – a global economic trigger

The first, often discussed possibility is that supplies are cut by an attack on the trade route through the Straits of Hormuz.  On a normal day around a fifth of global oil demand – 18 to 21 million barrels – plus some 20 per cent of the world’s LNG pass through the Straits.  Their closure, even temporarily, would cause a spike in prices – both of oil and gas – greater than anything we have seen in the last twenty years.  This would be inflationary and could cause a global recession.

Wars are always unpredictable, but the closure of Hormuz does not seem likely.  Israel has targeted some of Iran’s energy assets such as the Tehran oil refinery and some internal gas supply lines. Those attacks are aimed at disrupting Iran’s internal economy and destabilising the Government of President Pezeshian – a stated aim of Israeli Prime Minister Benjamin Netanyahu. The Israeli Government will be aware that cutting off a fifth of world oil trade would inevitably lead to US intervention – something which would stifle the military campaign.

Iran’s dilemma: Self-sabotage or strategic restraint?

On the Iranian side closing Hormuz would be a self-inflicted wound.  Most of Iran’s oil exports, the key source of national revenue pass through Hormuz. Closure would damage some of Iran’s key allies – in particular China and Iran. 50 years ago, the oil passing through Hormuz was bound for the United States and Europe.  Now most of the 50 to 70 tankers which pass through the Straits each day turn eastwards.

A second possibility is that Iran sues for peace with the aim of protecting the Islamic Revolution.  Pragmatism has always been a characteristic of the regime in Tehran which has managed to stay in power for four and a half decades. A new generation of leaders who recognise the danger of alienating the mass of the Iranian population which is under 40 and little memory or knowledge of the original motives of the 1979 revolution could decide that this is the moment to rebuild an economy much damaged by sanctions.  This might not go as far as the regime change desired by the Israelis but would avoid the real danger of national collapse.  This too is unlikely but not impossible.  If carried through it would lead over time to an increase in oil production, the development of Iran’s massive gas reserves, and downward pressure on prices.

The third is that this is the beginning of another inconclusive war.  Israel has not as yet succeeded in breaking the Iranian nuclear programme.  Facilities have been damaged but the publicly available facts and the statements of the IAEA suggest that underground operations have not been touched.  To destroy them would require US weaponry and President Trump shows no signs of wanting to lead the US into another Middle East war.  

The unintended consequence: A regional arms race

This is probably the most likely outcome, but it carries great risks.  The success of the first waves of attack by Israel have demonstrated just why the Iranian leadership have wanted a nuclear deterrent of their own.  Conventional weapons have done only limited damage in Israel and have certainly not deterred Israel continuing attacks.  If the war continues this view can only be reinforced.  The covert constriction of nuclear weapons capability will continue using the accumulated stocks of enriched uranium which have not been located or destroyed.  That in turn could trigger a comparable desire for a nuclear deterrent in Saudi Arabia, Turkey and perhaps other states in the Middle East.  Few would feel themselves safe if Iran had the bomb and they did not.  Proliferation is a very serious risk.

A shifting market: From security fears to renewed transition momentum

The impact on the oil market of a continuing war would be profound. Energy security would be back at the top of the political agenda.  The world would be reminded that beyond the self sufficiency achieved by the US most of the world is dependent on supplies from a mixture of inherently unstable suppliers – not in the Middle East but also from countries such as Russia, Venezuela and Libya.  

There will be a renewed push to speed up the transition to local low carbon supplies of wind, solar and civil nuclear. Renewables will gradually reshape the electricity market but across the world electricity accounts for only 20 per cent of final energy consumption.  The world continues to rely on oil and gas.  The premium on access to secure supplies – from stable countries such as Norway, Canada and Brazil would rise, as would prices.

We do not know how events will proceed but it is probably safe to say that 5,000 years of conflict in the Middle East, described in detail in Ian Barnes’ fine book Crossroads of War, are not likely to end soon.  The world’s energy market will remain subject to those events – unstable, unpredictable and dangerously volatile.

Nick Butler

Visiting Professor, King’s College London and Member of ONS International Advisory Board.

June 2025

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