From the gas station to the mortgage: the impact of the war in the Middle East on our wallets

BarcelonaThe US and Israeli attacks on Iran are already impacting people's wallets. The situation will worsen the longer the conflict lasts and the longer it takes to resolve the closure of the Strait of Hormuz, through which a fifth of the world's oil and gas passes. "Nobody knows what will happen tomorrow, but we do know that the risk is very high," says Javier Díaz-Giménez, a professor at IESE Business School. The problem is that we are in a context of uncertainty and volatility, adds Pedro Aznar, an economics professor at ESADE Business School.

The fact is that the surge in oil prices, which have risen by around 50% since the outbreak of the conflict, is ultimately driving up inflation. We are poorer because, without an increase in income, we are bearing higher costs. The extent of all this will depend on the limitation of the oil supply, not only due to the closure of the Strait of Hormuz but also due to the inability of the Persian Gulf emirates to export their production. And especially that of a giant in the black gold business like Saudi Arabia. This is the cycle of the transmission of the effects of the crisis.

Oil

The conflict doesn't just affect exports through the Strait of Hormuz. Saudi Arabia is currently only able to export around 70% of its usual volume. The world consumes about 100 million barrels of oil per day, of which around 10% comes from the Saudi kingdom. The International Energy Agency (IEA), which represents the most industrialized countries, has begun releasing 400 million barrels from strategic reserves. But that, equivalent to four days' global consumption, won't be enough if the war drags on. That's why the US has lifted sanctions on Russia, in order to secure more suppliers, especially from Asian countries, much to the dismay of European nations. The price is rising because there is less supply. The problem is that the market isn't convinced that demand can be met, and the price of a barrel remains around $100. "Everything depends on whether or not the Strait of Hormuz opens," says Diaz-Giménez. This professor from IESE states: "There is a lot of uncertainty. It is not a desperate situation, but it is serious," especially the longer the Hormuz blockade lasts.

Fuels

The first stop on the oil price curve is the gas station. Fuel prices have risen rapidly, although the current prices of the most expensive oil shouldn't be reflected until later because they are based on futures contracts. For this reason, the Spanish government has urged the National Markets and Competition Commission (CNMC) to investigate potential price gouging. At gas stations, the price per liter of fuel has skyrocketed, even exceeding two euros for diesel. Diesel is rising more because the raw material represents a larger share of its retail price than gasoline. According to the industry association (AICE), 44% of what we pay for diesel is taxes, compared to 49% for gasoline. Furthermore, Europe has a diesel deficit, which it must import, and demand is higher because it is used in many industries.

Electricity

Another consequence of the war is the surge in gas prices, although it didn't reach the extremes seen during the invasion of Ukraine, when it hit €300 per megawatt-hour (MWh). The fact is, gas, being the most expensive energy source, often sets the price of electricity. Energy costs account for around 60% of the electricity bill. And while the wholesale price of electricity has multiplied, it fluctuates wildly with significant volatility.

Inflation

The increase in oil prices also affects fertilizers, which raises food production costs, as well as fuels, which increase transportation costs and, therefore, the price of many other products. Various studies reveal that every 10% sustained increase in the price of a barrel of oil translates to between one and three tenths of a percentage point in the Consumer Price Index (CPI). The problem is that already in February, before the war broke out, this indicator rose four tenths of a percentage point, to 2.3%. The savings bank foundation (Funcas) predicts that the conflict could push inflation in March to over 3.6% and exceed 4% in subsequent months. It is not currently expected to reach the levels seen during the invasion of Ukraine, when inflation reached 10.8% in July 2022.

Growth

All of this affects the overall growth of the economy. Families must allocate a larger portion of their income to energy and, therefore, spend less or cut back on other expenses, explains Pedro Aznar. This implies less economic activity, which translates into lower growth. And therein lies the dilemma: if the problem is centered on inflation due to high demand, the issue can be resolved by raising interest rates to cool prices. The situation is more serious if this price increase is due to supply and is compounded by economic stagnation, a phenomenon known as stagnation, warns the Esade professor. In fact, there are already large EU countries, such as France and Germany, with very weak growth. The Vice President of the ECB, Luis de Guindos, stated this week that the institution will revise its economic forecasts.

The mortgage

Rising inflation usually translates into interest rate hikes by the ECB. This leads to more expensive borrowing. The one-year Euribor, the benchmark used for variable-rate mortgages and the price at which banks lend money to each other, is rising and exhibiting volatile behavior in the face of expectations of further interest rate increases. Last Tuesday, the one-year Euribor registered its largest single-day increase in 20 years, and the following day it fell by a similar amount, before climbing again. Gonzalo Gortázar, CEO of CaixaBank, Spain's largest bank, said this week that "everything suggests this will push mortgages to higher levels." And it won't just affect those with existing variable-rate mortgages; new mortgages will also become more expensive.