As conflict escalates in the Middle East following the US-Israeli air strikes on Iran, the already-fragile global economy is at risk of being destabilised and the UK's could be particularly vulnerable, suggest reports. As previously reported, there were early fears of rising energy and fuel prices and now it is now it is thought millions of UK households could be impacted through the likes of inflation and interest rates too.
The fall-out from the conflict saw oil prices surge by as much as 13% after retaliatory Iranian attacks disrupted shipping in the Strait of Hormuz - the vital lane between Iran and the United Arab Emirates that connects the Gulf to the Arabian Sea and through which more than 20% of the world's oil is carried - with three tankers damaged on Sunday and others dropping anchor outside the Strait.
While most of those shipments were bound for China and India, rather than Europe, the disruption has caused global jitters, reports The Mirror. There is a risk of the oil price spike having a knock-on effect on fuel prices if it remains high and the conflict continues: below is a round-up of what the continuing conflict could mean for those in the UK.
Possible effect on pump prices
Following the Strait disruption, Brent crude - the benchmark price for purchases of oil worldwide - jumped to $82 a barrel, the highest since January last year, before retreating to $79. The group FairFuelUK says: “Even short-term, oil tanker route closures or increased shipping insurance risks could initially push Brent crude toward $80 to $90, with extended scenarios risking a 1970s-style energy shock and triple-digit prices.
"A sustained rise in Brent to $100 could add 10p to 20p per litre to petrol and diesel within weeks, based on historical patterns - similar to the surges seen in 2022 when oil hit $120 amid the Ukraine invasion. Brent crude spiking to $80 to $90 will add 5p to 10p per litre.”
According to latest figures from the AA, the average price of petrol is 132.p per litre and diesel is 142.4p. Maurizio Carulli, global energy analyst at wealth manager Quilter Cheviot, thinks the oil price will adjust quite quickly, depending upon how, and for how long, the military action continues.
He suggests if the situation calms over the next few weeks, the price could revert to $60 to $65 "given oil production is in excess of demand" and oil producers have some capacity to increase production. However, if it worsens and is prolonged, with shipping across the Strait halted, then he thinks "the oil price could feasibly rise to $100 and above".
Higher oil prices could also feed through to wholesale energy costs and, if both remain high, this could push up costs for businesses worldwide. Then there would be pressure on inflation, which has been easing in the UK and other countries in a welcomed reprieve for households.
Analysts also warn that retail gasoline prices in the US, which is the world’s biggest fuel consumer, may break above $3 a gallon because of the conflict. To make matters worse, Saudi Arabia is said to have halted production at one of its largest oil refineries following a reported drone strike.
What it could mean for interest rates
The consumer prices index measure of inflation has dropped to 3% but remains above the Bank of England’s 2% target. The Bank’s Monetary Policy Committee had been widely expected to cut its base rate from 3.75% to 3.5% later this month and any signs that inflation may not fall in line with the forecast could prompt concerns in some on the nine member committee.
Falling interest rates have helped millions of mortgage and other borrowers. Professor Mohamed El-Erian, of the University of Pennsylvania and economic advisor at Allianz, warns the escalating conflict risks hammering the global economy and especially countries such as the UK which have suffered low growth.
He told the BBC: “The Bank of England’s path to lower interest rates is already far from straightforward. It may not cut interest rates by as much as it would have otherwise."
While he also thought much will depend upon the extent and duration of the conflict, he called it "another shock to supply chains ... both maritime and aviation" and said there will be some long-lasting effects.
Potential effect on UK economy
The economy is in the slow lane and there were hopes of improvement through falling inflation and the Government announcement of growth-focused policies. But the concern is that the fall-out of the conflict affects growth around the world, which will lessen demand for UK goods and services.
Another concern is that people’s willingness to spend will be affected. Clive Black, vice-chairman and head of consumer research at Shore Capital, said that while the majority of imported foodstuffs to the UK come from the EU and so do not travel through the Gulf area, the "grocery segment" is more directly impacted by the price of crude oil.
And imported non-food goods are similarly affected. Mr Black suggests supply routes may be changed and shipping diverted to longer routes to avoid danger of bombing which would mean delays on goods' arrival and maybe higher freight costs.
However, manufacturers and retailers have "developed some capability" here through previous route disruptions so he said the key, currently unanswerable, question is "how long potential disruption persists". He added: "That timescale will clearly determine any supply chain and so potential inflation impact.”
Pensions and other savings
The escalating conflict has sent shockwaves through global stock markets, with share prices falling sharply at the start of the week. By Monday mid-morning the FTSE 100 was down by around 100 points, wiping about £24billion off the value of the UK's biggest listed companies.
That sharp decline should be put in the context of a longer-term rise in the index as well as other stock markets around the world. The Footsie, for instance, is up nearly 9% in the year to date alone.
Any fall in shares - not just in the UK but worldwide - threatens to dent gains in the value or investments in equities. That includes workers' retirement pension pots as well as people's stocks and shares ISAs and other saving investments exposed to the markets.