With Iran aggressively threatening Israeli interests, the risk for major supply chain disruptions to global oil markets increases significantly. Israel’s new threats to seal the Strait of Hormuz and take out Iran’s oil production facilities raised the specter of an Israeli attack among economists. Industry analysts are scrambling this morning to gauge the potential fallout on the UK economy.
Once Israel kicked off its first military strikes, the devastation truly exploded. This rapid escalation triggered one of the largest one-day surges in global Brent Crude oil futures. Prices jumped nearly 7%, or around $5 per barrel. The sudden spike in oil prices already has dire consequences. In October 2021, it was estimated to raise the UK’s inflation rate by 0.2 percentage points. Add to that the potential for further volatility in oil prices, which could add even more inflationary pressure that consumers and businesses are already grappling with.
It is threatening to increase tensions in the Strait of Hormuz, arguably the world’s most critical maritime chokepoint. This escalation makes the urgency of this entire situation even more urgent. Roughly 20% of all oil trade around the world passes through this narrowly squeezed waterway. Given all that, a blockade here would immediately threaten a key stabilizer for oil prices and a major threat to international trade in general. Economists warn that such actions could lead to a further spike in prices, impacting everything from fuel costs to consumer goods.
Israel and Iran’s proxy conflict is hardly new, but a series of recent escalations have dramatically raised the stakes. Analysts caution Netanyahu is preparing for a move to degrade or destroy programmatic Iranian oil production. If so, it would send tremors throughout international markets. Iran’s ability to export oil is currently under assault due to existing sanctions. If additional sanctions are enacted, they have the potential to totally starve the country’s oil industry.
The economic challenges posed by this conflict are especially unwelcome news for the UK. The Cost-of-Living Crisis On top of this, the UK is still coming out of the effects of the COVID-19 pandemic and facing increasing living costs. Rising oil prices risk busting household budgets and slowing economic growth. There are important lessons here that the Bank of England should heed. It now must contend with the normalizing of monetary policy in a fraught geopolitical environment.