The On-Going Effect of the US-Israel-Iran Conflict

The on-going Iranian conflict is affecting many aspects of life across the globe, the most notable being the price of oil and its derivatives. The price of oil remains very volatile, a week ago today the price opened at circa $120pbl and closed at circa $81.50pbl, and today Brent Crude is trading at above $104pbl. 

The knock-on effect will be felt by consumers across the globe as prices go up for heating, fuel at the pumps, food etc. Governments will be keeping a watchful eye on their own CPI (Consumer Price Index), as inflation will once again begin to rise. However, as outlined below, it’s not just the cost of crude oil that the conflict is pushing up.

Fertilizer Crisis

Fertilizer is essential for food production, however, just before spring which is many farmers’ planting season, the Iran Conflict is pushing up the cost of nitrogen products such as urea and ammonia. Urea for example is primarily used as a highly concentrated nitrogen fertilizer that promotes vigorous plant growth and has a nitrogen content of 46%, an essential tool for modern farming. Due to the current conflict, the price of Urea has surged by circa 34% to $600/T, and this together with other essential raw material will mean higher prices in the supermarkets with farmers across the globe rushing to secure critical fertilizers. 

Palm Oil

Due to the on-going Iranian crisis, Palm Oil futures are now over $100pbl as prospective demand for biofuel feedstocks spike and is almost at a parity with gasoil*. Palm oil is a versatile vegetable oil found in nearly 50% of packaged supermarket products. It is also a key ingredient in cosmetics, cleaning supplies, and biofuels, and is frequently added to livestock feed, especially in the dairy industry, due to its exceptionally high energy content.

*Gasoil – (AKA red diesel or tractor diesel) is a low-duty, red-dyed fuel identical to regular road diesel but restricted to off-road industrial, agricultural and heating use. It is a middle distillate derived from crude oil refining, primarily powering machinery such as tractors, cranes and generators. 

Global Food Supply

Farmers across many regions including Europe and Asia, are vulnerable to an oil and gas crunch due to the Iran conflict, and the scarcity of fuel will make it difficult to operate essential farm machinery. For example, in Bangladesh, farmers are unable to start their irrigation pumps due to the lack of diesel. In Australia, it is almost the planting season, and farmers have been advised of fuel delivery cutbacks. In the Philippines, it is predicted that fishermen and boat owners will not be able to go to sea.

Europe is also vulnerable, for example in Germany 100 litres of diesel is up by EUR 30, and in Romania, farm diesel prices have jumped about 30%. A UK farmer highlighted that existing diesel stocks will be exhausted by mid-spring. Beyond that point, agricultural operations will be forced to pay the prevailing market rate, provided that fuel supplies remain accessible.

Fuel Oil 

Fuel oil powers container ships and is the backbone of globalisation,  however, the price of this commodity is skyrocketing. Fuel oil is also known in the industry as the “bottom of the barrel”, and is usually cheap, flying under the radar compared to the more well-known fuels (that get distilled higher up petroleum distillation towers) such as gasoline, diesel and jet fuel. 

The shipping industry is now sounding the alarm as it’s not only the price of fuel oil that is worrying, some of the key ports across the globe may run out of stock forcing bulk carriers and container ships to halt in their tracks. Recent data released shows that fuel oil in two of the top three bunkering locations (Fujairah UAE and Singapore) are beginning to run very low on stocks. If the conflict continues for a couple months, fuel oil will become a major problem. 

Conclusion

Analysts warn that if geopolitical tensions are not resolved swiftly, the global cost-of-living crisis will intensify, potentially causing inflation to become entrenched across G7 economies once again. This means that central banks may be forced to increase interest rates, thereby increasing the cost of borrowing, energy and food, which will be very hard on consumers.