How wars in the Middle East affect oil prices?

When wars happen, the cost of goods and services usually rises, especially for raw materials such as oil. This study looks at how major wars have affected oil prices, the factors that cause oil prices to change, and the similarities and differences in how prices reacted during different conflicts.

Next, we examine key historical wars in the Middle East and the corresponding reactions in crude oil prices.

1. The Yom Kippur War

The Yom Kippur War, also known as the 1973 Arab–Israeli War, the Fourth Arab–Israeli War, the October War, or the Ramadan War, was fought from October 06, 1973 to October 25, 1973 between Israel and a coalition of Arab states led by Egypt and Syria. The war began on October 06, 1973, when the Arab coalition launched a surprise attack across their respective frontiers during the Jewish holy day of Yom Kippur, which coincided with the 10th day of Ramadan.

Effect on Crude Oil Prices (January 01, 1973 to December 01, 1974)

Between January 1, 1973 and December 1, 1974, crude oil prices rose sharply following the outbreak of the conflict. As Arab oil-producing countries announced production cuts, global oil supplies tightened significantly. As a result, the price of a barrel of crude oil effectively quadrupled, increasing from roughly USD 3.56 to nearly USD 11.16 by early 1974.

Unlike price spikes observed during other conflicts, this increase was sustained for several years because it reflected a structural shift in global supply control rather than a temporary disruption.

Crude oil prices saw an increase of 213.5 per cent from January 01, 1973 to December 12, 1974. 

2. The Gulf War 

The Gulf War was an armed conflict between Iraq and a 42-country coalition led by the United States. The coalition's efforts were in two phases: Operation Desert Shield, which marked the military buildup from August 1990 to January 1991; and Operation Desert Storm, from the bombing campaign against Iraq on January 17, 1991, until the American-led liberation of Kuwait on February 28, 1991.

On August 02, 1990, Iraq, governed by Saddam Hussein, invaded neighbouring Kuwait and occupied the country within two days. The invasion was primarily over Kuwait's alleged slant drilling in Iraq's Rumaila oil field, and Iraq's large debt to Kuwait from the recently ended Iran–Iraq War.

Effect on Crude Oil Prices (January 01, 1990 to December 01, 1990)

Following the invasion in August 1990, crude prices nearly doubled from around USD 20, peaking at over USD 39 per barrel by September 1990 as markets feared Saudi oil fields were next. Once the U.S.-led coalition launched Operation Desert Storm and demonstrated it could protect the oil fields, prices crashed. Within weeks of the ground campaign starting, prices started to fall back.

3. The Iraq War

The Iraq War, also referred to as the Second Gulf War, was a prolonged conflict in Iraq from 2003 to 2011. It began with the invasion by a United States–led coalition, which resulted in the overthrow of the Ba'athist government of Saddam Hussein. During the US occupation of Iraq, the conflict persisted as an insurgency that arose against coalition forces and the newly established Iraqi government.

Effect on Crude Oil Prices (January 01, 2003 to December 01, 2003)

Interestingly, prices actually fell in the immediate aftermath of the invasion. Markets had already "priced in" the war months in advance. When the invasion began, the "uncertainty" vanished. Prices dropped from USD 36 to roughly USD 26 within two weeks.

Prices remained relatively stable as the initial military phase was swift and oil infrastructure was largely secured.

The largest monthly fluctuation in crude oil prices during 2003 occurred between March and April, when the price dropped by 16.2 per cent. Another significant decrease happened from February to March, with a 15.3  per cent decline. Overall, the biggest single-month change for the year was the 16.2 per cent decrease in April 2003. 

4. US-Israel-Iran Escalation (March 2026)

Following a series of escalating attacks, the United States and Israel launched strikes against Iranian targets, intensifying tensions in the Gulf region. In retaliation, Iran carried out missile and drone attacks on US military installations and Israeli territories, marking a significant escalation in hostilities. The killing of Iran’s Supreme Leader Ayatollah Ali Khamenei and several top Iranian officials further fuelled the crisis, prompting Israel to issue evacuation orders for villages in southern Lebanon amid rising tensions with Hezbollah.

Effect on Crude Oil Prices (January 01, 2025 to March 03, 2026)

As of March 3, 2026, we are seeing a live example of this historical volatility following strikes in the region. Crude has surged ~7 per cent in a single day (today), jumping from roughly USD 66 to nearly USD 72. Analysts suggest that if the Strait of Hormuz remains blocked, a "risk premium" of USD 5 - USD 20 will remain fixed. If the blockage is cleared quickly, prices historically retreat by 50 per cent of the initial spike within two weeks.

On January 1, 2025, crude oil was priced at USD 72.53 per barrel. By January 1, 2026, the price had fallen to USD 64.50. In February 2026, it rose slightly to USD 66.36, and by March 3, 2026, the price increased further to USd 72.01 per barrel.

Conclusion

While Iran has not officially declared the waterway closed, tanker owners have largely suspended shipments due to safety risks and reports of Iranian Revolutionary Guard Corps (IRGC) warnings. Two ships in the Strait were struck, halting some traffic and building tanker queues on both sides. Iran's Revolutionary Guards reportedly prohibited passage, though unconfirmed, risking 20 million barrels daily of crude and significant LNG flows.

Global markets reacted with volatility, as Iran exports (2.1 million bpd) face cuts and regional producers like Saudi Arabia and UAE remain exposed.

Unlike the 1973 or 1990 crises, the 2026 energy market has several "shock absorbers" that may prevent prices from hitting extraordinary marks. If the conflict remains a "war of missiles" between Israel and Iran, oil may stay in the USD 80 – USD 90 range. If the conflict becomes a "war of tankers" (blockade), we could see a historic spike toward USD 120+, as there is simply no global alternative to the 20 million barrels per day flowing through that gap.

The U.S. remains a net exporter, which helps cap global price spikes compared to past decades. Saudi Arabia and the UAE have significant idle production capacity and alternate pipelines (like the East-West pipeline) that bypass the Strait, though they cannot replace the full volume. Countries like India and the U.S. have significant stockpiles (India has ~74 days of coverage) ready to release if supply becomes critically tight.

For India, which imports over 85 per cent of its crude requirements, this conflict is a significant macroeconomic threat. India’s investment in Strategic Petroleum Reserves (SPR) and its 74-day buffer (commercial + strategic) means there will be no immediate "dry out" at petrol pumps. India can survive a short-term total cutoff. While the supply is secure, the price is not. India cannot "buffer" against a global price hike. A sustained USD 100+ oil price would likely force the government to either raise fuel prices (fuelling inflation) or increase subsidies (widening the fiscal deficit).

Disclaimer: The article is for informational purposes only and not investment advice.