ST Explains How volatile oil prices affect consumers in Singapore

Price increase could drive up cost of transport, electricity and overall inflation

- Sue-Ann Tan

Oil prices surged in the past week over conflict in the Middle East, as hostilities came to a head after Israel launched a missile strike on Iran on June 13.

Iran retaliated the following day and on June 22, the US joined the war, bombing three of Iran's key nuclear sites overnight.

Brent crude prices responded by soaring from US$69.36 a barrel on June 12, before the missile strikes were exchanged, to as high as US$79 on June 23.

Analysts feared oil prices would shoot past US$100 a barrel. This was especially if Iran blocked the Strait of Hormuz, through which around 15 million barrels per day or nearly a third of global seaborne crude oil exports transited.

A full closure would have the most severe impact on Asia, which receives nearly 80 per cent of these flows, said Rystad Energy analysts.

But on June 23, US President Donald Trump said a ceasefire between Iran and Israel came into effect. Oil prices reacted by falling to around US$68 a barrel.

Still, it is clear that oil prices are likely to be more volatile moving forward, as the situation in the Middle East remains uncertain.

HOW WILL THIS AFFECT COSTS?

Oil forms the main variable component in air travel, energy and shipping freight, said Dr Aurobindo Ghosh, assistant professor of finance at Singapore Management University, although the exact impact differs according to the nature of each business.

"Oil prices are quite pervasive, as they invade all parts of our lives through the cost of energy and cost of food," he said.

"For example, petrol prices at the petrol kiosk will go up, which in turn can affect delivery costs. If these increased costs are passed through to consumers, there is a potential of increased prices or inflation."

Oil prices also affect electricity costs, as around 95 per cent of Singapore's electricity is produced using imported natural gas.