How the Iran-US war could affect UK cost of living – from energy bills to petrol
It’s been just over a week since the United States launched an attack on Iran, sparking a conflict that has destabilized the entire Middle East region. The economic effects are being felt around the world as America and Israel continue to exchange fire with Iran, which retaliated by striking targets in the United Arab Emirates (UAE), Qatar, Bahrain, Jordan and Iraq.
As the conflict escalated, Iran warned that it would “set fire” to any ships trying to pass through the Strait of Hormuz, delivering a sudden shock to the global economy. Approximately 20 percent of the world’s gas and oil is transported by water, and the Iranian threat is causing great damage to global trade.
Ten ships have reportedly been hit since the start of the conflict, with a senior adviser to the Iranian military warning that it “will not allow even a single drop of oil to leave the area”.
The country’s approach has been called ‘economic warfare’ and the action has threatened to hit economies around the world. US President Donald Trump stated that his army could “seize” the Strait of Hormuz to mitigate the effects. Currently, trade has almost come to a halt.
In the UK, this has led to similar financial concerns as Russia’s invasion of Ukraine, which has long had an impact on the cost of living.
Addressing recent concerns, Prime Minister Sir Keir Starmer said: “It’s important to recognize that the work is needed, because people will feel it – I think you will too – that the longer this goes on, the greater the potential for impact on our economy, the greater the potential for impact on the lives and homes of everyone and every business.”
Shocks in global oil and gas trade can have a direct impact on household finances in both obvious and subtle ways. Here’s an overview of what’s likely to happen in the coming days and weeks:
energy bills
Wholesale gas prices have increased by almost 50 percent since the conflict began on Saturday, February 28. Although not directly related, these rates have a significant impact on energy costs in the UK and the level at which Ofgem sets the energy price cap.
The UK imports most of its natural gas supply (about 50 per cent) from Norway, with another 40 per cent produced domestically in the North Sea. Meanwhile, Qatar supplies the country with a small amount of liquefied natural gas (LNG), around 1 or 2 percent.
But although the UK’s dependence on gas produced in the Gulf is not obvious, the effects on trade there could have major knock-on effects on prices here.
James Meadway, founder of the new Verdant think tank and host of the Macrodose economics podcast, explains: “While the impact may initially occur in one market somewhere in the world, it begins to feed into what is happening elsewhere.”
“This is a huge shock and one that is already feeding into the gas markets in terms of the daily price paid by wholesale companies and what households (you and I) will pay will change in about three months and will probably go much, much higher.”
£160
How much the Iran conflict will add to energy bills
Good news for UK households; Setting the cap for April-June in February means that bills are effectively protected until July. The energy regulator announced a seven per cent, or £117, cut on that figure, broadly in line with Labour’s pledge to cut energy bills by £150 from the start of the new financial year by scrapping its energy efficiency plan.
The energy price cap sets the maximum amount that energy suppliers can charge for each unit of energy for those with standard variable tariffs. It covers most households and is expressed as the annual bill of an average home.
Ofgem will announce its July to September cap by 27 May. Energy consultancy Cornwall Insight warned this could be an increase as steep as 10 per cent or as much as £160, depending on the situation in the Middle East.
The increase threatens to effectively wipe out the savings Labor intends to transfer to households over the year; but in this scenario energy bills are still lower than they would be if the government made no changes.
In light of the situation, monetary experts advised households to take immediate action to protect themselves from worst-case scenario increases. Martin Lewis has called on bill payers to consider a fixed-rate energy deal, which guarantees 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 probably a critical period: this is usually when the next Price Cap (July to September) is announced. It now looks very likely to rise, but how much depends on how long the rise in current energy prices lasts.”
“If rates haven’t fallen by May and look set to stay high, so the October Price Cap will also rise and cheap fixes aren’t available, then things get into real trouble territory.”
Gasoline
The latest data shows petrol and diesel prices hit a nearly 20-month high this week, rising by between 4.68p and 8.59p per liter since Saturday, February 28.
On average, motorists can now expect 137.51 pence per liter of unleaded petrol and 150.97 pence per liter of diesel at the pump.
This means the cost of refueling a 55-litre family car has risen by £4.72 in just over a week, with further price increases expected in the coming days.
Commenting, AA chief Edmund King urged UK motorists to consider cutting back on “non-essential journeys” as fuel prices rise.
£4.72
How much does it cost to fill a 55 liter car compared to last week?
The increase was due to the increase in oil prices, which had a significant impact on the wholesale fuel cost. Brent crude, the global benchmark for oil prices, rose above $100 a barrel for the first time since 2022 on Monday.
As with gas, “the price of oil is determined internationally,” Mr. Meadway says. “If something disrupts global production in some way…then the price of oil goes up globally. Then that translates pretty quickly into the price you see at the gas pump.”
“This dramatic shock – perhaps the biggest oil shock ever – translates quite quickly into rising fuel prices.”
Food
Economists warn that one of the less obvious effects of the cost of living that could result from ongoing conflict is rising prices for food and other groceries.
In the short term, this is because shipping costs are rising as a result of rising oil prices and the cost of trade is rising. The fact that the UK imports around 40 per cent of its food supply could have a knock-on effect on prices on the shelves.
“Every part of the supply chain typically relies on gasoline, diesel and bunker fuel to transport these items, which will likely lead to food prices increasing quite rapidly,” Mr. Meadway says.
But the economist adds that there is a “slightly more uncertain” and “in many ways more fundamental” factor that threatens to push food prices up. This is the price of artificial fertilizer, an important product of Britain’s domestic agriculture.
Mr Meadway explains: “The Gulf is now one of the largest producers of artificial fertilizers in the world, and it does so because natural gas is a big input in making fertilizers, and there is a lot of natural gas in the Gulf, so it is quite cheap for companies to set up there.”
“If fertilizer supplies are disrupted for a period of time… then I think food prices will start to look pretty dramatic.”
As with any global conflict, the ongoing situation is fluid and unpredictable. The worst effects of the Ukrainian war were felt in February 2022, the first year of Russia’s invasion; inflation rose to 11.1 per cent in October of the same year and the price ceiling reached a record high of £4,279 in January 2023.
The worst effects can be avoided if the conflicts in the Middle East end as soon as possible. President Trump has already stated that his war with Iran could end “pretty quickly,” but the exchange of fire and the resulting deterioration in the global economy continues for now.
For the latest cost of living guidance, readers can visit The Independent’s regularly updated guide
