For the global economy, the downward trend in inflation has been a welcome development with central banks starting to cut interest rates.

At the same time, the potential for a sustained oil price spike to reignite inflation has come to the fore as tensions in the Middle East have escalated.

Home to major oil-producing states and a key transportation corridor, there is a historical link between conflict in the Middle East and dramatic increases in oil prices. Examples include the Arab oil embargo against countries supporting Israel in the Yom Kippur War in 1973-74, the Iran-Iraq War in 1980 and Iraq’s invasion of Kuwait in 1990.

Oil prices have bounced around quite a bit since the Hamas attack on Israel one year ago, but mostly for reasons unrelated to the hostilities in the Middle East. Even as the violence has escalated to include Lebanon and Iran (the latter a major oil producer, oil markets have been, as CNN reporter Matt Egan recently put it, “remarkably calm.”

The West Texas Intermediate (WTI) oil price benchmark has been on the rise so far in October, but it remains below US$80 and the September forecast from the U.S. Energy Information Administration has WTI averaging just under the 80-dollar level that next year. (Our latest forecast pegs it at US$74 in 2025.)

Traders appear to be waiting to see if oil supply is actually disrupted by events in the Middle East rather than reacting to the risk that it will be disrupted.

This could, however, change very quickly if traders start to react differently to the elevated risk levels or if supply is physically disrupted by, for example, an Israeli attack on Iran’s oil fields.

At the same time, because OPEC has been voluntarily limiting the amount of oil it is producing, there is a backup source of supply that could come online quickly and reduce the upward pressure on prices.

We don’t know how this will play out, but we can say with some certainty that, if there is a sustained spike in oil prices, it could trigger a new round of high inflation and dampen global growth.

Answer to the previous trivia question: John Maynard Keynes wrote The General Theory of Employment, Interest, and Money.

Today’s trivia question: Used frequently in economics, what does the Latin phrase ceteris paribus mean?