Key facts
- Crude oil prices have surpassed $100 a barrel.
- US diesel prices rose 60% since late February, reaching $6 per gallon.
- Economists warn that rising energy costs will eventually be passed to consumers.
- 90% of traders expect a 25 basis point interest rate hike from the Federal Reserve.
- The European Central Bank cited Middle East conflict as a driver of inflation pressures.
- The Houthi attack on Saudi Arabia's East-West pipeline threatens 4% of global oil supply.
Crude oil prices have surged past $100 a barrel, reigniting inflation fears and prompting central banks to reconsider interest rate policies. Diesel prices in the United States have jumped 60% since February, reaching an all-time high of $6 per gallon, according to The Wall Street Journal. While the broader core inflation reading for August remained at 2.4%, economists warn that energy cost increases will eventually be passed on to consumers as businesses struggle to absorb such significant price hikes.
The escalating conflict in the Middle East and dwindling global oil stocks are contributing factors. The Wall Street Journal reported that many companies hedge against higher oil prices, but these deals are temporary and future hedging will involve significantly higher prices. Economist Sung Won Sohn noted that energy inflation eventually impacts nearly every sector of the economy.
The chances of the Federal Reserve hiking interest rates this week have risen considerably, with The National reporting that 90% of traders in a CME Group survey expect a 25 basis point hike. MPA Macro economist Derek Tang cited the risk of a prolonged Iran war as a reason for the lack of relief in energy prices.
The European Central Bank is also concerned, as the European Union is more vulnerable to energy import shocks than the United States. The ECB announced a 25 basis point rate hike last week, with President Christine Lagarde highlighting the increased relevance of refining margins. The bank stated that the conflict in the Middle East continues to generate inflation pressures, which are set to remain well above target for an extended period.
The Houthi attack on Saudi Arabia's East-West pipeline, which threatens up to 4% of global oil supply, further exacerbates the situation. This loss, combined with earlier supply disruptions from the Middle East and Russia, particularly in diesel fuel, raises the risk of sustained inflation as the Northern Hemisphere enters its peak demand season for oil and diesel.