How Big an Impact Will the Israel-Iran Conflict Have on Global Oil Trade?

Geopolitical conflicts are prone to causing upheavals in global economic stability, especially when they involve large-scale oil-producing countries. Historical events have recorded a series of occurrences that negatively impacted the global economy when several energy-producing nations were involved in armed conflicts. So, will the rivalry between Israel and Iran also pose a risk to the global economy?

According to economist from Prince Future Group, Phil Flynn, said that the conflict is not a conflict that will end immediately. He suspects that this war will drag on like the Ukraine-Russia war. This has had an impact on the price of goods in the United States which has increased 10 percent since Israel's attack on Iran last Friday (6/13/2025). Financial research firm, Barclays, predicts that there will be a spike in oil prices which risks weakening currencies in countries in the Asian region. Thus, there will be a slowdown in development in the region (Kompas.id, 6/18/2025)

From the data oilprice.com, it shows that the world crude oil price of West Texas Intermediate (WTI) has spiked after the war broke out. On June 11, the price of WTI oil was around 68 US dollars/barrel, but when the military attack began to heat up on July 13, the oil price jumped to 71.29 US dollars/barrel. The price has continued to climb until now, reaching around 75 US dollars/barrel.

If the conflict continues, there is a possibility that global oil prices will keep rising. Moreover, this conflict appears to have involved a broader geopolitical scale. The group of developed countries that are part of the G-7, which includes the United States, the United Kingdom, Canada, France, Germany, Italy, and Japan, has expressed its support for Israel. This support was officially conveyed yesterday (17/6/2025) during the agenda of the G-7 Summit meeting in Canada.

The G7's support for Israel is likely not limited to mere diplomatic backing, but it is also possible that it will be accompanied by military support. U.S. officials reported that they have sent large-scale refueling tanker aircraft to the Middle East. Additionally, it was confirmed that the USS Nimitz aircraft carrier is moving from the South China Sea southwest towards the Middle East.

The military movement coincides with the ultimatum from U.S. President Donald Trump, who urged the residents of the Iranian capital, Tehran, to leave the city immediately. This statement was made by Trump during the G-7 summit. Such a situation indicates the possibility of U.S. military involvement in the next military attack on Iran.

So, will the escalating geopolitical conflict have serious implications for the global economy? Considering that Iran is one of the major oil-producing countries and is a member of the Organization of the Petroleum Exporting Countries (OPEC).

According to the Energy Institute 2024 report, Iran's oil production in 2023 was approximately 4.6 million barrels per day. This oil production accounts for about 4.8 percent of global oil production. In the Middle Eastern region, Iran's oil production ranks as the second largest after Saudi Arabia, which is capable of producing 11.4 million barrels per day. Globally, Iran's oil production ranks fifth after the United States, Saudi Arabia, Russia, and Canada.

When looking at the order of international production, it appears that Iran holds a very strategic position in the world's energy production. This means that the turmoil occurring within Iran will also impact the global situation related to the export trade of Iran's fossil energy.

However, that assumption seems relatively inaccurate. This is because Iran's global energy trade transactions are relatively limited to only a few countries. According to a report by Resource Trade Earth, in 2022, Iran's fossil energy exports were directed solely to a few countries, namely China, Pakistan, India, Armenia, and Turkiye.

The trading partners are not significantly different from previous years, which tend to be limited to a few countries. Iran has also sent fossil energy products to Iraq, Kenya, and other neighboring countries. Currently, the largest share of fossil energy products is directed towards Pakistan, Armenia, and Turkiye. This means that Iran's fossil energy commodities are only targeting certain countries, so when viewed from a global macro perspective, they do not have a substantial impact on many countries.

This situation is somewhat different from the Russia-Ukraine conflict, where Russia, as one of the largest oil producers in the world, has a much broader and larger market share than Iran. The market share of Russian fossil products targets a significant portion of Europe, the United States, Turkey, China, Japan, Korea, and parts of other Asian regions.

This caused global oil prices to soar immediately when the Russia-Ukraine war broke out in February 2022 due to a shortage of products in its partner countries. Moreover, this was accompanied by an embargo policy on Russian products to the European Union market. It will take a considerable amount of time to reduce global oil prices to below 100 US dollars per barrel as a result of the Russia-Ukraine conflict.

Nevertheless, the relatively small impact of energy supply from Iran to the global market should not be overlooked. This is because Iran's location in the Middle East is highly susceptible to triggering global energy turmoil, particularly affecting the production or distribution of oil in the countries of the Middle East. With the largest oil production in the world, approximately 30 million barrels per day, the Middle East is very vulnerable to the effects of such conflicts, which can lead to a surge in global oil prices.

Moreover, Iran's geographical position borders the Persian Gulf and the Gulf of Oman, which are vital arteries for the distribution of fossil energy trade in the Middle East. In fact, the Strait of Hormuz, which connects the Persian Gulf and the Gulf of Oman, is under the authority of Iran, making the current escalating conflict prone to triggering a rapid surge in global energy prices.

Major energy producers in the Middle East such as Saudi Arabia, Bahrain, Kuwait, Qatar, the United Arab Emirates, and Oman will temporarily avoid the Persian Gulf and the Gulf of Oman. They are likely to distribute via land routes and pipelines to Oman to ensure safe global shipments, avoiding conflicts around Iranian waters. They may also use land routes to the Red Sea in Saudi Arabia for shipping worldwide. This distribution of products will undoubtedly incur higher costs, leading to a surge in crude oil prices.

If this occurs, then the rise in global energy prices will be difficult to avoid. Considering that petroleum products from the Middle East region, particularly from Gulf countries such as Saudi Arabia, Bahrain, Kuwait, Qatar, the United Arab Emirates, and Oman, account for approximately 24 percent of the world's fossil fuel oil exports.

In the context of rising energy prices, regions with minimal energy resilience will experience significant economic pressure. Areas with limited fossil energy resources will feel the impact of rising prices in general or inflation due to the increase in energy prices in their country.

Of the seven regions in the world, almost all are experiencing a surplus in crude oil production in their respective areas, except for the European and Asia-Pacific regions. These two regions have a deficit in crude oil production within their countries. This means that the amount of oil energy consumption exceeds the production capacity in the respective regions.

According to the 2024 Energy Institute report, the European region is experiencing a deficit of approximately 9.6 million barrels per day, while the Asia-Pacific region's deficit exceeds 30 million barrels per day.

The region with the largest surplus of crude oil production in the world is the Middle East, with a surplus of 20.17 million barrels per day; followed by Central and South America, which reach 20.6 million barrels per day; then the CIS region or former Soviet Union, with a surplus of approximately 9.2 million barrels per day; and finally, North America and Africa, each with a surplus of around 3 million barrels per day.

From the data description, it indicates that the regions most vulnerable to the rise in global energy prices are Europe and the Asia-Pacific. Therefore, the escalating conflict in the Middle East must be addressed wisely by the countries in the region to prepare mitigation measures in case the war expands and impacts the distribution of fossil energy in the Middle East as a whole.

Indonesia, as one of the countries in the Asia-Pacific region and a net importer of oil, or a country whose majority of oil products are sourced from imports, must be vigilant regarding this situation. The government must prepare fiscal and monetary policy scenarios if necessary to anticipate the economic threats arising from the conflict.

In addition, the government must also be proactive in mobilizing diplomatic support with other countries to reconcile and prevent wider conflict escalation. Thus, threats to humanity in conflict areas and economic downturns can be anticipated as early as possible. (LITBANG KOMPAS)