Oil price rises above $117 a barrel amid fears US will renew strikes on Iran
Real-world example for IB, A-Level, AP and IGCSE Economics essays: Supply shocks, Cost-push inflation, Supply, demand and prices
What happened
Brent crude rose above $117 a barrel, its highest level in more than six months, as markets feared the US could renew strikes on Iran and Tehran threatened retaliatory attacks on Gulf refineries and datacentres.
The economics
This is a supply shock: geopolitical conflict threatens the supply and transport of oil, shifting the supply curve left and pushing the price up when demand is unchanged. Higher oil prices then raise firms' energy and transport costs, which can feed through the supply chain as cost-push inflation.
Figures to quote
- $117 a barrel
Evaluation
Whether the oil price rise becomes broad inflation depends on whether firms can pass costs on to consumers, whether wages follow, and whether central banks tighten policy; if tensions ease and supply recovers, the price shock may be short-lived.
Practice question
Using this event, analyse how geopolitical conflict can affect oil prices through a supply shock, and discuss its possible impact on a country's inflation.
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Where it fits in the syllabus
- Supply shocks: A sudden change in supply, such as energy, food or supply-chain disruption, that moves prices and output.
- Cost-push inflation: Higher costs of production such as wages, energy or materials lead firms to raise prices.
- Supply, demand and prices: How a change in demand or supply in one market moves its equilibrium price and quantity.
- IB Economics: Demand, Supply and Elasticity, Aggregate Demand and Supply
- A-Level Economics: Supply and Demand, Aggregate Demand and Supply, Macroeconomic Objectives
- AP Macroeconomics: National Income and Price Determination
- AP Microeconomics: Supply, Demand and Market Equilibrium
- IGCSE Economics: Demand and Supply, Macroeconomic Objectives