U.K.Energy in A Conflicted World.

 

GLOBAL INSECURITY AND POLITICAL EXTREMISM

HOW IS THE UK AFFECTED?

Background.

On February 28^th, 2026, Israel and the United States began a campaign of military strikes against Iran. In response, Iran launched air strikes against Israel and U.S. military bases plus other targets in many nearby Arab states including energy infrastructure. And additionally, Iran both threatened, and then acted against, ships travelling through the Strait of Hormuz, the narrow sea lane which links the Arab/Persian Gulf to the Gulf of Oman and beyond, to the wider sea. The result of the Iranian Gulf of Hormuz air strikes resulted in a massive decline in shipping traffic in the Strait of Hormuz thus curtailing the export of oil and gas from the Persian Gulf. By mid-March 2026 the International Energy Agency estimated that around 20 million barrels of oil had been affected by the Iranian-imposed reduction in shipping volume in the Strait of Hormuz, with oil production cut by at least 10 million barrels in the Gulf countries, equivalent to about 10% of global production. Liquefied natural gas exports from the region, notably from Qatar and the United Arab Emirates, have also been severely disrupted. The result of this disruption to energy supplies has been a sharp rise in the prices of oil, other petroleum products and natural gas in international markets. Brent crude [an international benchmark price for oil] rose from around $70 a barrel, pre-conflict, to over $100 a barrel, with volatility in prices resulting from the uncertainties of the developing situation.

Effects on the UK.

U.K. wholesale natural gas prices rose by roughly 75% between late February and 23^rd March 2026 together with other petroleum-based products, such as jet fuel and heating oil, with attendant costs inevitably increasing sharply. The Persian Gulf is also an important hub for fertilizer production and exports; thus, fertilizer prices have also risen, raising agricultural costs and potentially, threatening future crop yields.

The initial economic consequences of the conflict have already been felt in the UK. Petrol prices have risen between 28^th February and 23^rd of March, by approximately 14 pence a litre (10%) while diesel prices have risen by 29 pence a litre, (about 20%) and farmers have reported large increases in the costs of their fuel and fertilizer. The National Farmers’ Union has already warned that food prices will rise due to the higher costs of energy and fertilizer while the manufacturers’ trade body, Make UK, has underlined the impact of high industrial energy costs on the manufacturing sector.

 Prior to the conflict, the U.K. inflation rate had been expected to fall from 3% at the beginning of 2026 to closer to 2% from April 2026, remaining at the lower rate for the rest of the year. It remains difficult to forecast likelihoods, as uncertainty over the duration and extent of the Middle East conflict continues, but the Bank of England had a shot on 19^th March 2026 and suggested that the CPI [Consumer Price Inflation] would likely remain between 3% and 5% for the rest of this year. The Bank’s Monetary Policy Committee [MPC] on the same day announced that its main interest rate continued at 3.75%.

As the UK is a net energy importer, higher energy costs are likely, perhaps inevitably, to lead to UK economic activity weakening. Forecasts for UK GDP growth in 2026 have been cut, with slightly varying figures suggested for growth: Barclays, and KPMG, 0.7%; Oxford Economics, 0.4%; Pantheon Macroeconomics, 0.6%. Prior to the conflict, the Office for Budget Responsibility had forecast GDP growth at 1.1% in 2026. Slower GDP growth may lead to downward pressure on inflation as reduced demand for goods and services leads to, at least, some firms pricing more competitively in order to attract more customers. However this is a slow and unsteady process which could easily be overwhelmed by sudden oil and gas supply shocks pushing up prices with the global turmoil continuing.