The Impact of the Israel-Iran Conflict on the Cost of Living in Great Britain
The cost of living in Great Britain is facing fresh pressure due to the Israel-Iran conflict and growing tensions in the Middle East. The potential consequences of this conflict are initially observed in global oil prices. The Middle East accounts for a third of the world’s oil production, with Iran being the second largest provider of natural gas.
The Effect on Oil Prices
Global oil prices rose by up to 13% when the conflict in Israel-Iran increased. This was the greatest one-day leap since Russia invaded Ukraine in February 2022, which produced an energy-oriented lifestyle crisis. Brent crude oil, the international benchmark, has seen its costs increase by 15% from a low of $64 (£47) a barrel at the beginning of this month.
The Role of Iran in the Global Oil Market
Iran sends its entire oil supply to China due to western sanctions, so the second largest economy in the world would have to lose the most in the event of disruptions. If this happens, China would have to replace this oil by buying elsewhere on the international market, threatening higher prices.
The Impact on Natural Gas Prices
Prices for British daily beings have increased by 15% in the past week alone. Nowadays, Europe is more dependent on liquid gas (LNG) from the Middle East due to sanctions against Russia. Great Britain is particularly exposed to this because it has a low storage capacity and relies on gas-fired power to keep the lights on and to heat.
The Risks of Higher Prices
Market experts say that Brent crude oil would easily exceed $100 (£74) in the event of an Iranian threat to the supply of Hormuz – the 30 miles wide shipping lane controlled by Iran and Oman. While Iran has interrupted trade in the past, analysts believe that it does not want to risk its oil and gas income through a blockade.
The Impact on the British Economy
There is an impact on the entire economy at a time when the Chancellor can afford it the least. Higher oil, gas, and fuel costs will be passed on to down supply chains – from the refinery and the factory – to the end user, and consumers. It could affect everything, from food to false tan. Increases on the pumps are usually the first to appear, and energy costs will also absorb the gas tips, especially if the wholesale price has increased.
The Future Outlook
So much depends on upcoming events. However, the increase in energy prices is an inflation risk and a potential threat to future interest rate cuts. While financial markets are still expecting two further interest rate reductions by the Bank of England this year, the interest rate committee is reluctant to reduce if price growth has been higher than expected. At a time when employers deal with higher taxes and minimum wage thresholds and consumers face "terrible April hikes on taxes of the council, water, and other basics", a freshly energy-bound tip of inflation is the last thing everyone needs.
