Britons are braced for higher prices at the pumps, after a rise in oil prices caused by the conflict between Israel and Iran in recent days.
Oil prices climbed again on Monday, as traders worried about the risks of a broader regional military conflict, which could disrupt supplies. Iran is a big oil producer, and accounts for about 3% of global supplies.
As the conflict entered its fourth day, Brent crude rose by 0.5% in early trading pushing towards $75 a barrel, while US crude rose by 0.7% to $73.42. Brent later fell, down 0.5% at $73.78 a barrel.
Crude prices jumped by more than 13% on Friday to their highest levels since January, and closed 7% higher for both benchmarks, after Israel hit more than 100 targets in Iran, including nuclear facilities and missile sites, and Iran responded with its own missile strikes on Israel.
Thomas Pugh, an economist at the consulting firm RSM UK, said: “Just as tensions and uncertainty around global trade and tariffs seemed to be easing with a deal between the US and China on tariffs, the Israel-Iran escalation represents a new source of geopolitical tension.
“The main way this will impact UK businesses and the economy is through higher oil and natural gas prices.”
He noted that oil prices had risen by about $10 a barrel in the past week, which is likely to result in a 5p increase in petrol and diesel prices at the pump over the “next couple of months”.
Average UK petrol prices remained stable at 132p a litre and diesel at 138.2p a litre on Friday, according to the AA, which will publish updated prices later on Monday.
Wholesale petrol costs are above where they were in April and May but still way down on levels seen in the first quarter of this year. Aside from the oil price, another big factor that influences prices at UK pumps is US demand for gasoline during the summer motoring season, the AA said.
The sell-off in oil markets has been limited, so far. In London, the FTSE 100 share index gained nearly 0.4% and the oil company Shell’s stock climbed by 1.3%, while BP was up 0.2%. Stock markets in Germany and France rose by almost 0.4% and 0.7%.
“The market currently anticipates a limited conflict, though there is little indication that hostilities will end quickly,” said Jochen Stanzl, the chief market analyst at CMC Markets. “It is expected that fighting will continue unabated this week, albeit on a limited scale.”
Mohamed El-Erian, an economic adviser to the insurance giant Allianz, said the conflict risked causing slower global growth, increased inflationary pressure, reduced “policy flexibility” for central banks, and “further gradual erosion of the global order”.
James Hosie, an analyst at Shore Capital, said the spike in Brent crude to almost $75 a barrel could be temporary, if the direct impact on Iran’s oil facilities remained limited.
Over the weekend, airstrikes by Israel targeted energy assets including the Shahran oil depot and Shahr Rey refinery close to Tehran, and the South Pars gas field. This raises the risk of a direct impact on Iran’s 2m barrels of oil exports a day.
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There are fears that Iran’s next response could target regional energy supplies by disrupting tanker movements in the strait of Hormuz – the waterway off the south coast of the country through which 20% of global oil supplies and 20% of liquefied natural gas flow.
This would mark a significant escalation of the conflict, as it would affect exports from Saudi Arabia and other Middle Eastern oil and liquefied natural gas producers, along with their customers, particularly China, Hosie said.
However, he said other members of the Opec oil cartel and allies, notably Saudi Arabia, could raise oil production to offset any disruption to Iranian exports, and others such as US shale producers could also step in.
The price of oil had been well below the $80.53 a barrel average recorded last year before the conflict, with prices at the pump easing.
Rachel Reeves said over the weekend that the UK government would do “everything in [its] power” to protect people in Britain from the knock-on economic effects.
The chancellor would not “take anything off the table” to tackle the threat of rising energy costs, she told the BBC’s Sunday with Laura Kuenssberg.
After Russia’s full-scale invasion of Ukraine in 2022, oil prices spiked to nearly $130 a barrel, raising prices for everything from transport to food.
“There is no complacency from myself or the Treasury,” Reeves told the BBC. In 2022, the Conservative government stepped in to help households with their energy bills, but the chancellor said “we are not anywhere near that stage at the moment”.
