The Iran-Iraq Conflict & Oil Prices: A Simple Breakdown

The tensions in the Middle East have made oil prices very sensitive in recent years but the escalation of the situation with Iran and Iraq in 2025 has caused oil prices to rise. While there is hope that OPEC+ can adjust the supply to help neutralise the impact or at least cap the rise, the situation remains volatile and uncertain. In this short analysis, we’ll explore what drives global oil prices and what the Iran-Iraq war could mean for energy markets in the near term.

The changing face of oil market dominance

Going back in history, oil markets were dominated by the Middle Eastern countries, particularly Saudi Arabia, Iran and Iraq. However, recently, increase in the production of US shale and Chinese oil has diversified the market, although only a little! This shift has diluted the Middle East’s dominance, but the region remains central due to its strategic reserves and export routes.

Drivers of oil prices

The oil market has drastically transformed over the last decade. While supply and demand remain foundational, other factors such as geopolitical risk, energy transition policies and financial market sentiment have started playing larger roles. On the demand side, there is a global push towards renewable energy sources such as wind, solar and nuclear to meet climate goals. This slow but steady transition is beginning to gradually diminish long-term oil demand. According to an analysis published by IEA in 2025,

“Global oil demand is forecast to rise by 2.5 mb/d from 2024 to 2030, reaching a plateau around 105.5 mb/d by the end of the decade. However, annual growth slows from roughly 700 kb/d in 2025 and 2026 to just a trickle over the next several years, with a small decline expected in 2030.”

However, the war is not long-term (hopefully!) and so, we are concerned with short term impacts. Unfortunately, in the short-term (for at least this winter), classic demand and supply forces play a vital role in setting oil prices. OPEC+ still is retains influence but US could perhaps act as a stabiliser.

Impact of the war

Looking at the WTI Crude graph, we can clearly see how reactive oil price has been to the movements of this war – rising when Iran and Iraq commenced the war to falling when Iran stroke back on US missiles.

It’s important to note that while the Iran-Iraq war in the 1980s caused oil prices to spike dramatically, today’s energy landscape is more diversified and resilient. However, key vulnerabilities sustain. This winter, prices would regardless be impacted because there is a passage in Iran from where oil is transported (from Middle East to the West) called The Strait of Hormuz. If this is compromised in any way, it will cause an impact on your energy bills similar to the food price inflation when Russia-Ukraine war escalated.

Impact on your bills

In the UK, energy inflation may be mitigated somewhat if trade agreements with countries like Norway or energy arrangements with the US are successfully negotiated and expedited. That said, even the best-case scenarios would not fully shield consumers from higher winter energy bills in the event of a prolonged conflict.

Conclusion

In conclusion, while the global oil market is more diversified than in the past, the Middle East remains critically important. The Iran-Iraq war is a reminder of how quickly geopolitics can send shockwaves through global markets. The good news is that coordinated efforts by oil producers and responsive policy decisions can help soften the blow. Not all is doom and gloom but staying informed is essential to managing both household budgets and national energy strategies in uncertain times.

Disclaimer: This article is for informational purposes only and reflects the author's personal views based on current publicly available data as of June 2025. It should not be taken as financial, investment, or energy policy advice. Market conditions can change rapidly, and readers are encouraged to consult official sources or professionals for critical decisions related to energy planning or investments.