Unrest in the Middle East has sent oil prices on an upward trajectory and left Irish consumers asking if this will hit them in their pockets.
What has happened?
Following US and Israeli strikes on Iran, ships were reportedly banned from passing through the Strait of Hormuz on Saturday by Iran’s Revolutionary Guard.
The strait is not technically closed, but de facto, it is. As market intelligence firm Kpler put it: “Insurance withdrawal is doing the work that physical blockade has not.”
One of the region’s largest production hubs, Saudi Aramco’s Ras Tanura oil refinery, also came under drone attack and has curtailed production.
READ MORE
Transport infrastructure has also been hit.
Why does the Strait of Hormuz matter?
At least one fifth of the world’s oil and gas flows through this narrow waterway at the mouth of the Gulf. A large share of the world’s fertiliser exports also come through the shipping lane.
The big issue is that there are few alternatives when it comes to transporting crude oil and other commodities from the region, as road transport fleets would struggle to meet the demand.
How have the markets reacted?
Brent crude, the global benchmark for oil prices, jumped by 8 per cent on Monday after at least three ships were attacked near the Strait of Hormuz at the weekend. Natural gas prices also surged.
Chris Beauchamp, chief market analyst of trading platform IG Group, said these higher prices are unlikely to reverse even if attacks cease – but if hostilities grow, prices will increase further.
The result, he said, is likely to be months of higher inflation, with electricity prices affected.
How will this impact you?
“Fuel prices will rise due to the recent activity in the Middle East,” said David Blevings, a spokesman for the Irish Petrol Retailers Association.
The association expects an increase in retail prices, but believes this “could be short lived” as the market adapts and other oil sources ramp up production.
Many of the major suppliers to service stations use ‘hedges’ or secure price lock-ins for agreed upon periods, which may offset the immediate impact of changes in oil prices. Stockpiling is also common with larger chains.
Further, wholesale oil prices only make up about 40 per cent of the price you pay at the pump – the rest is mostly tax and Government duties.
As a result, while wholesale prices may increase by 10 per cent, the resulting rise is unlikely to match that, said Daragh Cassidy of mortgage broker and price comparison site Bonkers.ie.
Some less expected areas that are likely to be hit, Beauchamp explained, are food and sugar products. The area has a number of major sugar refineries, such as the Al Khaleej Sugar Company (based less than 200km from the Strait) and Etihad Food Industries.
A rise in natural gas prices will also hit consumers, as food production is a heavy energy user. Natural gas also accounts for a third of Ireland’s energy generation need, according to the International Energy Agency.
When are you likely to feel it in your pockets?
Cassidy said rising gas prices will not result in “immediate increases” to household bills. While it often takes time for cheaper wholesale prices to come to the consumer, “the reverse is also true, whereby increases in wholesale prices are slow to trickle down”.
Food and sugar products may be impacted more quickly than oil and gas prices, with Beauchamp suggesting this inflationary pressure could be reflected in price tags on supermarket shelves “this month or next”.
Price changes in industries reliant on oil, such as petrol stations, however, are more likely to be seen in the medium term.
Europe does not import a significant amount of oil from the Strait, with much of it exported to Asia, but that could be felt in Ireland too as Asian manufacturing costs increase.
Aidan Meagher, co-head of geopolitical strategy at EY Ireland, noted that there has been a “flight to the US dollar” due to the uncertainty.
Any increases to the dollar will make buying US products more expensive for consumers, though the situation will be favourable for Irish exporters.
He also warned that shipping costs are likely to increase, as companies look to avoid the area, which could involve sailing around South Africa’s Cape of Good Hope, a more lengthy and expensive route. – Additional reporting Bloomberg
