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Qabil Ashirov

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The latest military confrontation in the Middle East has once again demonstrated how fragile the global energy market can be. Within a matter of hours, geopolitical tensions pushed oil prices to the psychological threshold of $120 per barrel. Azerbaijan’s benchmark crude, Azeri Light, climbed as high as $125 on global markets. Yet the surge proved short-lived: following remarks by U.S. President Donald Trump, prices retreated sharply and fell below $90.

Even so, the volatility of the past days should not obscure the larger picture. While Trump’s statements may have temporarily cooled the market, the underlying tensions remain unresolved. As long as the conflict persists, renewed spikes in energy prices probably will increase. Because the surge observed this week was not driven by traditional economic fundamentals such as supply shortages or rising demand. Rather, it reflected the market’s instinctive reaction to geopolitical risk. Investors, traders, and governments alike rushed to price in the possibility that the conflict could disrupt oil supplies in one of the world’s most strategically important energy regions.

Rising oil prices rarely produce uniform outcomes. Instead, they generate a complex web of economic and geopolitical consequences that can simultaneously benefit some countries while harming others.

For the global economy, the most immediate risk is a renewed surge in inflation. In the aftermath of the COVID-19 pandemic, inflation became one of the most pressing economic challenges for governments worldwide. Although price pressures began to ease in subsequent years, the outbreak of the Russia-Ukraine war prevented inflation from declining as quickly as policymakers had hoped. By early 2025, there were cautious signs of improvement. Many central banks believed that the worst of the inflationary wave had passed, and discussions about monetary easing had begun.

Indeed, several countries had already started lowering interest rates. The United States, the eurozone, and even smaller economies such as Azerbaijan initiated modest rate cuts in anticipation of a gradual stabilization in global prices. Many widely expected this process to continue throughout 2025 and into 2026, allowing economies to recover from years of tight monetary policy.

However, the confrontation in the Middle East threatens to derail these expectations. Higher oil and gas prices inevitably feed into transportation costs, electricity prices, and ultimately the cost of everyday goods. If energy prices remain elevated, central banks may be forced to postpone further rate cuts. In a more pessimistic scenario, persistently high inflation could even push policymakers to raise interest rates again. Such a reversal would undermine fragile economic recoveries and increase borrowing costs for governments, businesses, and households alike.

Europe faces an especially complicated situation. Since 2022, the continent has already been grappling with the economic consequences of the war in Ukraine. Western governments responded to Russia’s invasion with extensive financial, technological, and military support for Kyiv while imposing sweeping sanctions on Moscow. These measures did weaken parts of the Russian economy, yet they did not deliver a decisive economic blow. Russia managed to cushion the impact of sanctions largely through the export of commodities such as oil and gold, which provided a crucial lifeline to its budget.

In response, Europe attempted to reduce its dependence on Russian energy. The European Union gradually eliminated most imports of Russian gas, while Western governments also sought to restrict buyers of Russian oil. Countries that continued purchasing Russian crude, including India, faced increasing diplomatic pressure and the threat of sanctions.

Until recently, many analysts believed that global oil prices would decline further in 2026. Azerbaijan, for instance, had estimated the average price of oil at around $70–72 per barrel last year and projected a price of approximately $65 per barrel for 2026. These expectations were based on two key assumptions. First, global inflation appeared to be easing, reducing upward pressure on commodity prices. Second, some analysts believed that Western countries had a strategic interest in keeping oil prices relatively low in order to limit Russia’s revenue and weaken its ability to finance the war in Ukraine.

The eruption of conflict in the Middle East has dramatically altered this outlook. Higher oil prices inevitably benefit energy exporters, and Russia is among the most prominent of them. Even countries that had begun reducing their purchases of Russian oil have started reconsidering their positions. India, for example, has signaled that it may continue buying Russian crude despite earlier indications that it might scale back under Western pressure.

In this context, rising oil prices could provide Russia with additional financial resources, allowing Moscow to sustain its military operations in Ukraine for a longer period. Moreover, Russia’s status as one of the world’s largest exporters of gold further strengthens its financial resilience. High commodity prices create additional streams of revenue that can partially offset the impact of Western sanctions.

Another geopolitical risk arises from the shifting priorities of the United States and its allies. If the conflict in the Middle East intensifies, Washington may need to allocate more military resources to the region. Increased shipments of weapons and military equipment to the Middle East could potentially reduce the supply available for Ukraine. Such a development would indirectly strengthen Russia’s position on the battlefield.

For Azerbaijan, the consequences of oil surpassing the $120 threshold are both positive and negative. On the positive side, higher oil prices translate directly into increased export revenues. Azerbaijan’s economy remains heavily dependent on energy exports, and a rise in crude prices can significantly strengthen the country’s financial inflows. Additional revenues may allow the government to expand funding for social programs, infrastructure projects, and economic development initiatives.

Perhaps the most important benefit relates to Azerbaijan’s external trade balance. Over the past three years, the country’s positive trade surplus has been shrinking steadily. Some analysts even predicted that 2026 might mark the first time since the early 2000s that Azerbaijan’s foreign trade balance would fall into deficit. Such a development could have placed pressure on the national currency, the manat. The memory of the 2015 devaluation still lingers in the country’s financial system, and another sharp depreciation could have undermined the fragile recovery that followed the pandemic years.

Higher oil prices, at least temporarily, reduce this risk. Stronger export revenues help stabilize the country’s foreign currency reserves and ease pressure on the manat. In this sense, the recent surge in oil prices provides Azerbaijan with a financial cushion during a period of global uncertainty.

Yet the benefits come with significant drawbacks. Azerbaijan imports a large share of its consumer goods, ranging from food products to industrial equipment. Rising energy prices tend to increase transportation and production costs worldwide, which in turn push up the price of imported goods. In practical terms, this means that Azerbaijan may end up importing not only products but also inflation.

The paradox is clear: the same oil price increase that strengthens Azerbaijan’s export revenues may simultaneously raise the cost of living for its citizens.

The events of the past week serve as a reminder that energy markets remain deeply intertwined with global politics. A single geopolitical shock can upend carefully crafted economic forecasts, forcing governments and central banks to rethink their strategies overnight. Whether oil prices remain elevated will depend largely on the trajectory of the Middle East conflict. But one thing is already clear: the world economy is once again being shaped not only by supply and demand, but by the unpredictable dynamics of geopolitics.