Oil prices have jumped by more than $2 a barrel after Iran’s most powerful general was killed in an airstrike ordered by Donald Trump, raising the prospect of an escalating crisis in the Middle East that could disrupt the world economy.
The price of Brent crude rose by about 3% on Friday to more than $63 (£48) a barrel as traders responded to news of the attack that happened in the early hours of the morning.
Stock markets in the US and the UK fell on the news, ending recent rallies, as investors moved money into gold and government bonds, traditional safe havens in times of turmoil.
Ian Shepherdson, the chief economist of the consultancy Pantheon Macroeconomics, said that full-blown war between the US and Iran was unlikely, but that oil industry infrastructure across the region would be a prime target in the event of tit-for-tat escalation.
“It’s hard to overstate the geopolitical importance of Friday’s assassination. Iran right now is reeling from the assassination, but the leadership is dominated by hardliners and the question is how, not whether, they will respond. For markets, the key issue is the impact of the Iranian response on oil prices,” he said.
Oil installations and crude shipments have been increasingly targeted in recent months amid rising tensions in the Middle East. About a fifth of the global oil supply flows through the Strait of Hormuz, a narrow shipping route between Oman and Iran which is one of the world’s most important strategic choke points.
Iran seized two oil tankers – one registered in the UK, the other in Liberia – passing through the strait last July. Iran-aligned Houthi rebels in Yemen also claimed responsibility in September for launching drone attacks against a major Saudi oil facility. The attack led Saudi Arabia to temporarily shut down half its oil production, causing the biggest daily jump in global oil prices since 1988. Saudi Arabia is the world’s largest exporter of petroleum.
Sanctions imposed by the US have dragged down the Iranian economy and driven up inflation and petrol prices in recent months, triggering protests in which hundreds of protesters have been killed by army and police.
Oil companies listed on the London Stock Exchange rallied against a backdrop of steep losses for company shares elsewhere around the world, with gains for firms including BP and Royal Dutch Shell. Analysts said they could benefit from the higher price of crude.
Economists say that higher oil prices represent a tax on oil consumers and a windfall for producers. World oil consumption is equivalent to about 100m barrels per day, meaning that every $5 increase in prices is equivalent to an annualised tax of about $183bn a year, or 0.1% of the world economy, Shepherdson said.
“If Iran takes more drastic action than we are expecting, it will become a real risk,” he added.
The FTSE 100 index of leading UK company shares was down 50 points to 7,553 after rallying strongly over the past month. All the US markets fell with the Dow Jones Industrial Average ending down 233 points, or about 0.8%.
Despite the latest attack, the price of oil remains below a peak of about $75 a barrel in April last year. Several major nations have become less dependent on Middle Eastern oil in recent years, including the US, which has ramped up domestic shale production.
Oil production has been constrained by Opec (the Organization of the Petroleum Exporting Countries, which contribute about 40% of the world’s oil supply, to keep the price of crude stable as the global economy slows. Manufacturing around the world has been weak in recent months amid the US-China trade dispute, which has depressed world trade levels.
Jim McCormick, the head of global desk strategy at NatWest Markets, said Opec could raise its output if the oil price spiked significantly, but warned that the prospect of greater tensions could still push up the price.
“One would imagine there would be some retaliation from Iran, so there’s almost a guaranteed pickup in tension from here. What it is we don’t know,” he added.