Oil Prices Surge Amidst US-Israel Conflict and Iran’s Response
Global oil markets are experiencing significant disruption and price increases following escalating tensions between the United States and Israel, and Iran’s retaliatory actions. The conflict has led to supply chain concerns, particularly impacting the critical Strait of Hormuz, and raising fears of a prolonged period of higher energy costs.
Escalating Tensions and Supply Disruptions
Recent hostilities have prompted a series of disruptions to oil supply routes. Following attacks on US bases in the Gulf, Saudi Arabia granted the United States expanded access to King Fahd Air Base in Taif, allowing for increased American military presence and overflight permissions. Middle East Eye reports this decision reflects a shift in the approach of Saudi Arabia and other Gulf states towards supporting the US in a potential conflict with Iran.
The closure of the Strait of Hormuz following the US-Israel attack immediately impacted oil shipments. Insurers refused to cover cargo destined for the channel, halting vessel traffic and creating a shortage of tankers. While Saudi Arabia, Iraq, Kuwait, and the UAE initially maintained oil production, onshore storage facilities quickly reached capacity, forcing a reduction in pumping operations. Approximately nine million barrels of oil per day have been shut-in across these four countries, representing over eight percent of the pre-war total.
Price Increases and Economic Impact
The oil shock is larger, in percentage terms, than those experienced in the 1970s. Analysts predict that if disruptions persist, the price of Brent crude could exceed its all-time high. The average US gasoline price has already risen to nearly four dollars, compared to less than three dollars before the conflict began, with potential for further increases to five dollars per gallon.
Rising oil prices are expected to impact a wide range of costs beyond gasoline, including airfares, plastics, and fertilizers. Concerns about the economic impact have contributed to a four-week decline in the Dow Jones Industrial Average. While some economists, like those at Goldman Sachs, believe a recession can be avoided, the surge in oil prices introduces significant uncertainty.
US-Saudi Arabia Alliance
The United States and Saudi Arabia have maintained a strong alliance since 1933, formalized by the 1951 Mutual Defense Assistance Agreement. According to Wikipedia, this relationship is based on the US providing military protection in exchange for a reliable oil supply, pricing oil in US dollars, and support for American foreign policy. The alliance has deepened over time, particularly after the Soviet invasion of Afghanistan in 1979 and during the Gulf War in 1990-1991.
In November 2025, President Donald J. Trump secured an agreement with Saudi Arabia for the purchase of nearly 300 American tanks, bolstering Saudi defense capabilities and supporting US jobs. The White House reported this agreement as a solidification of the economic and defense partnership between the two nations.
Looking Ahead
The expansion of hostilities, including attacks on energy infrastructure – such as Iranian missile strikes knocking out approximately one-sixth of Qatar’s LNG facilities – suggests a potentially prolonged conflict. The situation remains fluid, and the ultimate impact on oil prices and the global economy will depend on the duration and scope of the conflict. As Jerome Powell, the Fed chairman, stated, the surge in oil prices represents “an energy shock of some size and duration,” creating significant uncertainty about the future.