The price of oil surged overnight to its highest level since 2022, as doubts resurfaced regarding the full reopening of the Strait of Hormuz shipping route. Brent crude oil briefly pushed beyond $125, a peak not seen since Russia's invasion of Ukraine. By Thursday 9am BST, the price had eased slightly to $118.
What This Means for UK Households
The rise comes amid fears that US President Donald Trump is preparing to escalate the conflict with Iran through further military action. Talks between the US and Iran over a permanent end to the hostilities have been painfully ineffective, despite an initial short-term ceasefire agreement, prompting concerns over the ongoing supply of oil and gas to the wider world.
Brent crude, a global benchmark, was priced below $70 prior to the war and is a key pricing component for energy, fuel, transport, food production, general manufacturing, and other household costs. It is important to note that while the price hit $125, that is the value on June futures. Oil is typically sold via monthly contracts ahead of time, and the June contract expires on Thursday night as pricing rolls over into July futures, which are presently lower at around $112.
Petrol and Fuel
Petrol prices have already jumped by about 10p per litre for petrol and 15p for diesel. Motoring groups like the RAC state that it usually takes two weeks for significant shifts in the oil price to feed through to the pumps. The AA reports that petrol is currently costing 158p per litre, while diesel stands at 191p per litre. For context, the highest oil price ever reached was $147 in 2008, and record pump prices came in July 2022 when petrol was 191.53p and diesel was 199p.
A $10 increase in the price of a barrel of oil translates to roughly 6-8p on the price of a litre of fuel after adjusting for tax. Danni Hewson, head of financial analysis at AJ Bell, commented: "The current price at the pump is already wincingly high, and recent falls in the oil price have been slow to filter through. So today's spike might not massively increase costs for motorists, especially if it is short-lived. If oil remains over $120 a barrel or rises further, motorists will likely face an unpleasant surprise in the next couple of weeks."
Lindsay James, investment strategist at Quilter, added: "UK consumers have faced a price shock at the petrol pumps so far, but as the war and subsequent supply constraints continue, the chance of physical shortages will increase, not just at the pumps but across global supply chains and a range of goods."
Energy Bills
The major factor in most people's energy bills is gas prices rather than oil, with the exception being off-grid customers who rely on heating oil, for whom the government has already offered some support. The energy price cap was set at £1,641 per year from April 1 to June 30. A spokesman for Energy UK said: "We have had elevated gas prices as well since the conflict started. Because of the way the price cap works, that hasn't hit the majority of customers yet, but there is going to be a significant rise in July when the next one starts." If the oil price remains elevated, it could mean a hike more like the £332 that had originally been predicted by Cornwall Insight before the ceasefire was announced.
Food and Groceries
While there is no specific amount by which different foods and drinks will rise, all are affected by rising energy and transport costs, including the price of growing, manufacturing, or moving foodstuffs to sale points. The Food and Drink Federation (FDF) earlier this year warned that grocery prices could rise by as much as ten per cent and now note that it can take up to a year for prices to be fully passed through the system, depending on contracts with suppliers, manufacturers, and other parts of the supply chain.
Dr Liliana Danila, FDF chief economist, stated: "The war in Iran has delivered a cost shock that is already too large for manufacturers to absorb in full. The impact on prices will take time to work its way through the system, but it's only a matter of time before it does." Meanwhile, the Energy and Climate Intelligence Unit (ECIU) has warned that poorer UK households will be harder hit by inflationary food costs than their more well-off counterparts, due to lower-income households spending a greater percentage of their money on necessities, including food, resulting in a bigger overall hit to spending power and living standards.
Interest Rates and Inflation
The Bank of England voted on Thursday to hold interest rates at 3.75 per cent. However, there are concerns that this will need to be raised once more later in the year to guard against rising inflation caused by the oil price spike. A further rise in Brent costs will add to worries that Monetary Policy Committee members may see an interest rate hike as necessary. Higher interest rates mean potentially higher borrowing costs for those not on fixed-rate products, while those needing a new mortgage further down the line will see lenders increase their rates on deals. Businesses tend to borrow and invest less when interest rates are up, and households spend less on discretionary items, thereby lowering demand and helping to stifle additional price rises, which is what inflation effectively is.
Expert Opinions
The National Debtline service reports that they are beginning to see early signs of new cost-of-living pressures taking effect, with credit card debt (43 per cent of March callers) and energy bills outstanding (39 per cent) being two key concerns. Ms James added: "Although the loss of oil supply could theoretically be largely replaced in the short term through a mix of spare capacity, additional pipelines, inventory releases, and the temporary removal of sanctions, the obstacles are relatively high. If these issues persist, we could see broadening price rises, not limited to energy bills, for the duration of the blockade."
Susanah Streeter, chief investment strategist at Wealth Club, warned there could yet be more to come as higher costs ripple through industries. "With oil storage limited, Iranian facilities may have to reduce production within days. There had been high hopes that a ceasefire would start to see prices at the pumps retreat, but amid this standoff, it seems that the only way is up for the cost of filling up," she said. "It is also set to keep freight costs highly elevated, looks set to push packaging costs higher, given plastics are made from petrochemicals, and could have a highly damaging effect on global food production. Urea shipments, used for fertiliser, are blocked, and costs have rocketed for farmers around the world who did not buy stocks in advance. The worry is that all these costs will be passed on through supply chains, pushing up the price of everyday goods later in the year and into next year."
