How Middle East Conflict Impacts UK Household Finances and Energy Bills
Conflict in the Middle East has unleashed significant turmoil in global financial markets, driving wholesale oil prices to levels not seen for years. This escalation has ignited widespread concerns about potential knock-on effects on economies worldwide and the cost of living for households across the United Kingdom. Here, we explore the multifaceted ways this conflict could affect personal finances, from energy costs to inflation and beyond.
What’s Happening to Gas and Oil Prices?
A major impact of the escalating conflict in the Middle East is on the world's oil and gas supplies. Prices have been climbing higher amid fears that the fighting is disrupting supply chains and limiting transportation capabilities globally. Reports indicate that Iran has effectively blocked commercial ships from passing through the Strait of Hormuz, a crucial shipping route used by tankers carrying about one-fifth of the world's oil supplies and seaborne gas, leading to a near-standstill in traffic.
The price of Brent crude, a global benchmark for oil from the North Sea, has surged past $100 a barrel, reaching levels not seen since the summer of 2022. Natural gas prices have also soared after QatarEnergy, Qatar's state-backed energy company, announced a halt in liquefied natural gas production due to attacks on its facilities.
What Does This Mean for My Energy Bill?
While the UK imports oil and liquefied natural gas from various regions, not solely the Middle East, disruptions in the Strait of Hormuz could increase demand for alternatives, potentially leading to significant rises in gas and electricity prices. This scenario mirrors what occurred after Russia's invasion of Ukraine in 2022, as wholesale gas prices directly influence electricity costs and home heating expenses.
Analysts at Cornwall Insight forecast that household energy bills could rise by 10% from July, following sharp increases in wholesale gas prices. This would push Ofgem's price cap for July to September to £1,801 annually for a typical dual-fuel household, an increase of £160 or 10% compared to April's cap. However, the final figure depends on average wholesale prices over a three-month period, meaning volatility duration is key.
National Gas, which operates Britain's gas network, has stated no current concerns about supply security. Approximately three-quarters of Britain's gas comes from the UK continental shelf and Norway, with around 18% from LNG, primarily produced in the US.
What About Petrol and Diesel Prices?
The cost of crude oil significantly affects wholesale fuel prices, driving sharp increases at petrol pumps. The RAC reported that the average price of a litre of petrol at UK forecourts was 137.5p on Sunday, rising nearly 5p since February 28 when the conflict began. Average diesel prices increased almost 9p over the same period to 151p.
Think tank the Energy and Climate Intelligence Unit analysis shows that oil trading at $100 a barrel could push petrol prices to about 150p per litre, while $120 a barrel might lead to prices around 170p per litre. RAC head of policy Simon Williams noted that oil prices would need to rise significantly and remain elevated to have a dramatic effect, with other experts suggesting gradual price rises for both petrol and diesel.
Are Shop Prices Going to Be Affected Too?
Rising oil and shipping costs, alongside supply route disruptions and raw material shortages, could filter through to shop prices in the coming months. Analysts highlight specific categories to watch, including fragrances like oud and luxury scent bases, and Middle Eastern foods such as dates, olive oil, nuts, and spices like saffron.
Beyond these, the Middle East largely imports everyday food products, so global food supplies are unlikely to be directly hit. However, the region is a major producer of fertilisers like ammonia and sulphur, and any disruption could drive up costs for farmers worldwide, potentially affecting products like bread, cereals, pasta, potatoes, and animal feed.
UK brands relying on global supply routes near the region could also face impacts from increased shipping costs or lengthened delivery times if the conflict persists. Balwinder Dhoot, director of growth and sustainability for the Food and Drink Federation, said it is too soon to gauge the full impact but expressed concern over gas price spikes, calling for government support to help the energy-intensive sector weather these challenges.
What Could This Mean for Inflation and Interest Rates?
Experts warn that elevated oil and gas prices could push up inflation in the UK. The British Chambers of Commerce forecasts that higher prices linked to the conflict could increase Consumer Prices Index inflation to 2.7% by the end of 2026, up from a previous 2.1% forecast. This might discourage the Bank of England from cutting interest rates in the near term as it monitors the situation.
The National Institute of Economic and Social Research predicts that a prolonged energy price shock could push rates above 4% by year-end, from the current 3.75%.
What’s Happening to Mortgages?
Several major mortgage lenders have hiked rates recently, following rises in swap rates influenced by global events. HSBC UK, NatWest, Nationwide Building Society, and Coventry Building Society are among those adjusting rates amid changing market conditions.
Financial information website Moneyfacts reported multiple lenders adjusting rates on Monday, with average fixed mortgage rates increasing over the weekend. The average two-year fixed homeowner mortgage rate rose to 4.87% from 4.84% on Friday, while the average five-year fixed rate increased to 4.98% from 4.96%.
