Goldman Sachs says that oil could reach $110 a barrel (for Brent crude). In May, the price was near $60. So that would be more than an 80% increase over the period.
The trigger for the price surge would be the growing war with Iran. That conflict now includes the United States. The exact figure is based on the assumption that the oil tanker traffic through the Strait of Hormuz would decrease by half for a month. After that, the price is expected to be $95 if traffic through the passage is down 10% for the following 11 months.
Twenty percent of the world’s seaborne oil goes through the Strait of Hormuz. It is only 21 miles wide at its narrowest point. Saudi Arabia is the largest shipper of crude through the passage. Qatar ships huge amounts of natural gas across the same waters. The northern border of the passage runs along Iran’s southern border.
A sharp drop in supply would cause oil prices to rise quickly. At the start of the Russian invasion of Ukraine in February 2022, oil prices rose above $100. Russia is one of the world’s largest oil exporters.
The Effects of Higher Prices
The effects of higher oil prices on the U.S. would happen quickly. The average price of gasoline rose to nearly $5 a gallon by June 2022. Gasoline accounts for approximately 4% of consumer spending. While that may not matter much to the rich and upper middle class, it can significantly impact the discretionary income of the lower middle class and the lower class. It also changes spending for people who drive long distances.
Higher oil prices also affect a broad portion of the economy. The cost of heating oil, which is used in millions of American homes, is expected to rise. The same is true with jet fuel. The broadest industries where prices are expected to increase are petrochemicals. These are used to create plastics, rubbers, solvents, and fibers.
The Iran conflict could quickly change the household expenses of Americans.
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