Escalating military tensions in the Middle East are heightening geopolitical pressures at a time when tariff concerns seemed to be subsiding.
This is the view of Thomas Pugh (Economist at the consulting firm RSM UK), who notes that the primary way this will impact UK businesses and the economy is through higher oil and natural gas prices.
Indeed, oil prices have risen by about $10 per barrel (pb) in the last week, reaching $75pb on Friday. To put this into context, this time last year, oil prices were around $85pb and they are still way off their 2022 peak of over $120 per barrel.
“The most immediate impact will be on prices at the pump. A $10pb rise in oil prices will probably result in a 5p increase in pump prices over the next couple of months.
“As higher fuel prices make their way through the system, a rule of thumb is that a $10pb rise in the price of a barrel of oil eventually adds 0.1% to 0.2% to inflation. Natural gas prices have also risen, but by a slightly smaller amount,” he said.
Pugh noted that if oil prices stay around these levels, then it’s unlikely to make much difference to the Bank of England (BoE) and the paths for interest rates and economic growth this year. But that’s a big if.
Iran accounts for about 3% of global oil supplies. What’s more, about 20% of global oil and liquified natural gas (LNG) flows through the strategically important Strait of Hormuz,” he said.
“So far, no energy facilities have been targeted or supplies disrupted, which means the fundamentals of the energy markets haven’t changed. Indeed, the oil market is still oversupplied due to increased production from OPEC+ nations and a slowdown in global growth.”
An increase in risk
“What the surge in oil prices and the lesser rise in natural gas prices does represent is an increase in risk premium, said Pugh.
The big danger is an escalation that disrupts energy supplies from the region, he said.
“This would send energy prices much higher. In that case, a rerun of the 2022 energy crisis would be possible, with higher interest rates and another bout of stagnation or even recession. That would throw all of Rachel Reeves’s spending plans out of the window,” he said.
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