It has been just over a week since the US launched strikes on Iran, sparking a conflict that has destabilised the entire Middle East region. The economic impacts are being felt across the world as the America and Israel continue to exchange fire with Iran, which has retaliated by hitting targets in the United Arab Emirates (UAE), Qatar, Bahrain, Jordan and Iraq.
As fighting escalates, Iran has warned that it will “set fire” to any ships trying to pass through the Strait of Hormuz, delivering a sudden shock to the global economy. Around 20 per cent of the world’s gas and oil is shipped through the waterway, with the Iranian threat proving highly damaging for global trade.
Ten ships have reportedly already been hit since the conflict began, as a senior adviser to the Iranian military warns it will “not allow a single drop of oil to leave the region”.
The country’s approach has been called ‘economic warfare’, with the action threatening to hit economies across the globe. US president Donald Trump has indicated his military could “take over” the Strait of Hormuz to mitigate the impacts. At present, trade remains almost at a standstill.
In the UK, the situation has prompted similar financial anxiety to Russia’s invasion of Ukraine, which had a long-standing impact on the cost of living.
Addressing concerns in recent days, prime minister Sir Keir Starmer said: “It is important to acknowledge that work is needed, because people will sense – you will sense, I think – that the longer this goes on, the more likely the potential for an impact on our economy, impact into the lives and households of everybody and every business.”
Shocks to global oil and gas trade can have a direct impact on household finances in ways that are both obvious and subtle. Here is an overview of what could happen in the coming days and weeks:
Energy bills
Wholesale gas prices have risen by almost 50 per cent since Saturday 28 February, when the conflict began. Although not directly correlated, these rates are a major influence on energy costs in the UK and the level at which Ofgem sets its energy price cap.
The UK imports most of its gas supply from Norway at about 50 per cent, and a further 40 per cent is produced domestically in the North Sea. Meanwhile, Qatar supplies a small amount of liquified natural gas (LNG) to the country, about 1 or 2 per cent.
But despite Britain’s apparent lack of dependence on Gulf-produced gas, impacts on trade there can have massive knock-on effects on prices here.
Founder of the new Verdant think tank and host of the Macrodose economics podcast, James Meadway, explains: “The impact, although initially it turns up in one market somewhere in the world, it starts to feed into what’s happening everywhere else as well.”
“This is a huge shock, and one that’s feeding already into gas markets in terms of the day to day price that wholesale companies pay, and what households – you and I – will be paying will change in about three months time and it’s likely to go very, very high.”
£160
The amount Iran conflict could add on to energy bills
In good news for UK households, the cap for April to June was set in February, meaning bills are effectively protected until July. The energy regulator announced a seven per cent, or £117, reduction to the figure, broadly in line with Labour’s pledge to cut energy bills by £150 from the start of the new financial year through scrapping an energy efficiency scheme.
The energy price cap sets the maximum amount energy suppliers can charge for each unit of energy for those on a standard variable tariff. It includes most households and is expressed as an annual bill for an average home.
Ofgem will announce its cap for July to September by 27 May. This could be a steep increase of as much as 10 per cent, or £160, increase due to the situation in the Middle East, energy consultancy Cornwall Insight has warned.
The rise threatens to effectively wipe out the savings Labour was looking to pass to households over the year, however energy bills in this scenario are still lower than they would have been had the government not made the change.
In light of the situation, money experts have advised households to take action now to insulate themselves from the worst-case scenario rises. Martin Lewis has urged bill payers to consider a fixed tariff energy deal, which guarantees that customers will pay for their energy at a set rate for a set period of time, usually a year.
Commenting on the situation, the personal finance guru said: “The end of May is likely crunch time: This is usually when the next Price Cap (July to Sept) is announced. It currently seems very likely it will rise, though just how much all depends on how long lived the current energy price spike is.”
“If rates haven’t dropped back down by May, and it looks like it’ll stay high so the October Price Cap will rise too, and no cheap fixes are available, then things get into real problem territory.”
Petrol
Petrol and diesel prices have hit their highest in nearly 20 months this week, latest data shows, increasing by between 4.68p and 8.59p per litre since Saturday 28 February.
On average, drivers can now expect 137.51p per litre of unleaded petrol, and 150.97p per litre of diesel, at the pump.
This means the cost of filling up a 55-litre family car has increased by as much as £4.72 in just over a week, with further price rises expected in the coming days.
Commenting, AA president Edmund King has urged UK motorists to consider cutting out “non-essential journeys” as fuel prices rise.
£4.72
How much more it costs to fill a 55-litre car from last week
The rise has been fuelled by a spike in oil prices, which have a significant effect on the cost of wholesale fuel. Brent crude, the global benchmark for oil prices, jumped to over $100 a barrel on Monday for the first time since 2022.
As with gas, “the price of oil is set internationally”, Mr Meadway says. “If something disrupts global production in some way … then the price of oil globally goes up. Then that turns pretty rapidly into the price you see at the petrol pump.
“This dramatic shock – perhaps the biggest single oil shock ever – that turns pretty rapidly into rising fuel pricing.”
Food
One of the less obvious cost of living impacts that may arise from the ongoing conflict is increasing the price of food and other grocery items, economists warn.
In the short-term, this is because transport costs will increase as a result of rising oil prices, pushing up the cost of trade. With the UK importing roughly 40 per cent of its food supply, this could have a knock-on effect on the prices on shelves.
“Every bit of that supply chain is relying, typically, on petrol and diesel and bunker fuel to actually move this stuff around. That will turn into, quite likely, rising prices for food fairly rapidly,” says Mr Meadway.
But there is a “slightly more obscure” factor that threatens to push up food prices, the economist adds, which is “in many ways more fundamental”. This is the price of artificial fertiliser, which is a key product to the UK’s domestic agriculture.
Mr Meadway explains: “The Gulf now is one of the world’s largest producers of artificial fertiliser and it does that because a big input to making fertiliser is natural gas, and there’s lots of natural gas in the gulf, so it’s quite cheap for companies to set up there.”
“If fertiliser supplies are disrupted for a period of time … then food prices will start to look pretty dramatic I think.”
As with any global conflict, the ongoing situation is volatile and unpredictable. The worst impacts of the Ukraine war were felt within the first year of Russia’s invasion in February 2022, with inflation peaking at 11.1 per cent in October of that year, and the price cap hitting a record £4,279 in January 2023.
Should the conflict in the Middle East end soon, the worst impacts may be avoided. President Trump has already indicated that his war with Iran may be over “pretty quickly,” but for now the exchange of fire – and consequent disruption the the global economy – continues.
For all the latest cost of living guidance, readers can visit The Independent’s regularly updated guide
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