The escalating conflict in Lebanon has renewed fears of oil disruptions in the Middle East, but the extent of the impact on global markets and the potential for further escalation will largely depend on how Israel responds, according to AMP chief economist Shane Oliver.

In his latest market note, the economist stressed that while fighting continues to intensify in Lebanon, unless oil supplies are cut off, from an investment perspective, “it remains just another terrible war.”

“The key on this front is how Israel responds to Iran’s missile attack and whether that leads to further escalation between the two,” Oliver said.

According to Oliver, four scenarios face oil markets in the near term, the most unlikely of which is no response from Israel.

"It's unlikely, as has been said, to happen, but if it doesn't, oil prices will likely fall back to where they were before the Iran attack." Of course, Israel may just take some time to respond until it deals with Hezbollah,” Oliver said.

Another scenario could see Israel attack Iranian military targets and potentially secondary oil facilities such as refineries, in a "proportionate" manner.

In that case, oil prices would "probably bounce around current levels" but then settle back down, he said.

According to Oliver, such a scenario seems the most likely - with a 50 percent probability - with the US likely to pressure Israel to be "proportionate".

Alternatively, there is the possibility that Israel may choose to retaliate by attacking Iranian oil production and export facilities or nuclear facilities.

"This could see oil prices spike by US$10-15/bbl for a few months as Iran's 1.75 million bpd exports are disrupted, but will calm down again as spare capacity in Saudi Arabia/UAE makes up the gap,” Oliver said, placing a 30 percent probability of this scenario.

Under Oliver's fourth scenario, Iran retaliates against scenario three by attacking Saudi Arabia/UAE production and blocking the Strait of Hormuz, through which 20 percent of the world's liquid fuel supplies pass each day.

"This could push oil prices back to post-Ukraine-invasion highs of around US$120/barrel or more, which could add 50 cents a liter or more at the gas station for Australian drivers," Oliver said.

"This in turn would add about $18 to a household's weekly gas bill, acting as a 'tax' on costs depressing retail sales." The impact is similar elsewhere, and a surge in oil prices could also threaten progress in reducing inflation, although central banks, including the RBA, will focus on core inflation.

But the fourth scenario, according to Oliver, would be akin to Iran "shooting itself in the foot" and as such carries only a 10 percent probability.

As of Friday afternoon AEST, Brent crude futures were around US$79.07 a barrel.

The commodity rose about 11 percent after Iran's missile attack and returned to levels seen in August, which Oliver said was only in the realm of "normal volatility" and not enough to significantly affect global growth or inflation.