Iran-Israel Conflict Escalates, Oil Prices Could Reach 100 US Dollars

The Iran-Israel conflict could bring world oil to a new equilibrium price, above 90 US dollars, or even 100 US dollars.

AP PHOTO/TOMER NEUBERG

The Iron Dome, Israel's defense system, launched missiles to intercept air attacks launched by Iran, Sunday (14/4/2024).

JAKARTA, KOMPAS — The escalation of conflict in the Middle East with the air attack by Iran on Israel on Sunday (14/4/2024) has the potential to increase world oil prices. If the escalation continues, it is not impossible that world oil prices could reach 100 US dollars per barrel. An increase in oil prices is usually followed by an increase in prices of other commodities. This potential needs to be anticipated by the government and business world in Indonesia.

Iran carried out an air strike against Israel for several hours from Saturday (13/4/2024) midnight until Sunday (14/4/2024) morning. Quoting AFP, Israeli military spokesman Rear Admiral Daniel Hagari said in a television statement that Iran fired more than 300 ballistic missiles, drones, and cruise missiles towards Israel.

Also read: Iran Attacks Israel with Hundreds of Drones

The Israeli military claims to have successfully intercepted 99 percent of the air strikes. Nevertheless, air strikes that managed to bypass the Iron Dome, Israel's air defense system, have caused at least 12 residents to be injured.

The Iranian government stated that the attack was a response to Israel's attack on the Iranian consulate in Damascus on April 1st. A total of seven officers from the Islamic Revolutionary Guard Corps, including two senior commanders, were killed as a result of the attack.

Although the Iranian attack had stopped on Sunday morning, the risk of conflict escalation remains high. This situation has the potential to have negative impacts on the global economy. The direct impact that could occur is an increase in world oil prices, followed by an increase in the prices of other commodities.

AFP/ LOUAI BESHARA

Security personnel moved damaged cars from the rubble of the building at the site of an attack that hit the Iranian embassy in the capital of Syria, Damascus, on April 1, 2024.

News about the potential of Iran attacking Israel only circulated on Friday (12/4/2024), and the world oil prices immediately surged. Citing data from the economic and commodities database site, Refinitiv, Brent oil prices at the close of trading on Friday (13/4/2024) reached 90.45 US dollars per barrel.

This is the highest oil price since October 20, 2023 or about the past six months. This price has exceeded the assumption of Indonesia Crude Price (ICP) set in the State Revenue and Expenditure Budget (APBN) 2024 of 82 US dollars per barrel.

The price of Brent oil at the close of trading Friday (13/4/2024) reached 90.45 US dollars per barrel.

Citing CNBC, President of Rapidan Energy and former senior energy official in the Bush administration, Bob McNally, stated that the price of Brent crude oil could soar up to $100 per barrel if Iran directly attacks Israel. If escalation causes disruptions in the Strait of Hormuz, prices could soar up to $120 or $130 per barrel.

The Strait of Hormuz is located between Oman and Iran, connecting the Persian Gulf with the Gulf of Oman and the Arabian Sea. Quoting the US Energy Information Administration, the Strait of Hormuz is the most important oil trade route in the world because of the high volume of oil distributed through the strait.

In 2018, the distribution of oil through the Strait of Hormuz averaged 21 million barrels per day. This is equivalent to around 21 percent of global petroleum consumption.

KOMPAS/FAKHRI FADLURROHMAN

Lines of residents queuing to refill their vehicles with gasoline at a public filling station (SPBU) in Kemayoran, Jakarta, on Sunday (24/9/2023).

Lecturer at the Faculty of Economics and Business, University of Indonesia, International Economics, Fithra Faisal Hastiadi, said, geopolitical tensions between Iran and Israel in the short term will boost world oil prices. When supply is disrupted, while demand remains constant, according to economic law, the price of goods will immediately increase.

He added that the world oil price is expected to soon reach a new equilibrium or balance point above $90 USD per barrel and could even continue to rise, surpassing $100 USD per barrel. Even before this tension occurred, oil prices were already on an upward trend.

"The impact on Indonesia may lead to an imminent increase in fuel prices," said Fithra, reached on Sunday (14/4/2024).

The increase in oil prices, according to Fithra, will soon be responded to by the business world in theory. This is because energy components are part of production costs.

When energy costs rise, the business world usually reduces production size to maintain its selling price. However, if the cost pressure becomes unbearable, the business world will inevitably raise the selling price of its products.

According to Fithra, the increase in fuel prices will also trigger inflation directly. The transmission is through an increase in public consumption prices.

The ongoing depreciation of the rupiah exchange rate adds to the complication of challenges for the Indonesian economy.

The ongoing depreciation of the rupiah exchange rate adds to the complication of challenges for the Indonesian economy. In market trading, the rupiah exchange rate has reached IDR 16,000 per US dollar. As a result of the depreciation of the rupiah, fuel imports can also increase inflation from imported components or imported inflation.

Aside from being wary of the direct impact of oil price hikes, Fithra continued, Indonesia needs to anticipate the global economic impact of these price increases. This could affect Indonesia in the medium and long term.

Fithra explained that learning from the geopolitical tensions between Russia and Ukraine that occurred in 2022, the rise in global oil prices could have a wide-ranging impact on the global economy. The surge in world oil prices will boost global inflation.

As a result, the world's central banks will be in a position to raise benchmark interest rates. This situation will also be faced by the US central bank, The Federal Reserve (The Fed). Meanwhile, as per their initial plan, The Fed plans to lower the benchmark interest rate after March. This situation will prolong the uncertainty in the global financial market.

To curb inflation, Fithra continued, The Fed could extend its current benchmark interest rate position. As a result, other central banks will also make adjustments with the goal of maintaining the interest rate differential not too far from The Fed's.

If the world economy slows down, export performance could also slow down.

Because, if the difference in interest rates is too wide, there could be a reverse flow of capital out of the country. This situation could shake the stability of the country's exchange rate.

This year's global economic growth could slow down compared to initial estimates due to the increase in benchmark interest rates to control inflation caused by rising oil prices. If the global economy slows down, export performance could also slow down.

"I believe the government needs to quickly respond to the ripple effects of this issue within the country, as well as Bank Indonesia that needs to carry out its duty in maintaining the stability of the rupiah exchange rate," said Fithra.