Conflicts in the Middle East trigger immediate reactions in energy markets, even before supply disruptions occur. This article analyses the apparent paradoxes in the behaviour of oil prices and their derivatives, explaining the role of expectations, market structure and the specific characteristics of the Spanish energy system. It also briefly examines their impact on the global economic situation.

Oil is traded via futures contracts. The possibility of disruptions—rather than actual supply interruptions—is the main driver of volatility. Furthermore, Iran’s geostrategic position means that any conflict in which it is involved affects not only its own production (around 5% of the total) but also the supply from numerous Gulf countries and maritime transport through the Strait of Hormuz, through which 20% of global oil production passes.

In other words, the price of oil reflects not only current supply but also the perceived risk of future shortages, and this logic explains the rapidity of price rises in the face of geopolitical tensions, even though there are no actual supply problems and even when the fuel circulating in the market was produced prior to the war.

Overlapping this first level of price formation is the market for refined products, which introduces a second layer of vulnerability.

One of the main paradoxes is that refined products can become more expensive than crude oil itself, particularly diesel. This is because their price depends both on oil and on available refining capacity. The current situation has highlighted the vulnerability of the diesel and kerosene markets, which are particularly sensitive to disruptions in the Middle East due to limited refining capacity in other regions (IEA 2026).

Restrictions on exports of refined products by major producers, such as China, have exacerbated the situation. On the demand side, key sectors such as transport, agriculture and industry are structurally dependent on diesel, with no short-term alternatives. In other words, demand for diesel is less elastic than for petrol, which means that, in a situation of reduced supply such as the current one, prices rise more sharply.

The third level is the retail market, where distributors and service stations operate. This market exhibits oligopolistic characteristics, with vertically integrated companies (refining, transport and distribution). In this context, we observe the so-called ‘rocket effect’, where prices rise rapidly in response to cost increases; and the ‘feather effect’, where they fall slowly in response to cost reductions.

This behaviour is explained by consumers’ search costs, their lower sensitivity to small price drops, and limited effective competition in certain areas. To elaborate on the reasoning: above a certain price level, consumers react quickly and seek out cheaper petrol stations, but when the price falls slightly, many consider that the potential saving does not outweigh the effort of searching and the necessary detour.

When the behaviour of all consumers in response to small price drops is aggregated, demand becomes less price-sensitive and petrol stations have fewer incentives to reduce prices quickly, especially if competitors do not do so. As a result, the pass-through of cost reductions to the final price is often incomplete and asymmetric.

In Spain, the rise in fuel prices has been higher than the European average. One partial explanation is that Spain started from lower price levels. However, the market structure also plays a role. Approximately 56% of petrol stations in Spain are controlled by five major operators (CNMC 2025). This high concentration reduces competitive pressure and facilitates a faster pass-through of cost increases to the end consumer.

Finally, rising oil prices have a direct impact on inflation, both through their immediate effect on fuel and through their transmission to the wider economy. The rise in crude oil prices is quickly passed on to fuel and, through this, to transport and production costs. This second-round effect is reflected in higher prices for goods and services, particularly in energy-intensive sectors.

Furthermore, oil acts as a factor amplifying inflationary expectations. When businesses and consumers anticipate sustained rises in energy costs, they adjust prices and wages, which can generate more persistent inflationary dynamics.

In energy-importing economies such as Spain’s, the impact is greater: rising oil prices worsen the trade balance, increase business costs and reduce household disposable income.

In short, the evolution of oil prices in conflict situations is not solely driven by actual changes in supply, but by the interplay between expectations, geopolitics, refining capacity, market structure and demand behaviour.

The war in Iran highlights the global economy’s sensitivity to geopolitical tensions in the Middle East and its dependence on oil, and underscores the need to move towards a more diversified and resilient energy system that enhances energy security.

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*Disclaimer: This English version has been generated with the support of AI-based translation tools. In case of discrepancies, the Spanish original prevails.