The Strait of Hormuz, that narrow throat through which a fifth of the world's oil passes, has become a stage for yet another act of geopolitical brinkmanship. Today, the Royal Air Force confirmed it has deployed a Sentinel R1 surveillance aircraft to monitor the waterway, a move that reeks of the same old script: escalating rhetoric, naval posturing, and the inevitable spike in global crude prices.
Let us not mince words. This is not a humanitarian mission. This is a signal to Iran, to the market, and to every hedge fund manager with a Brent crude contract that Britain is prepared to defend the free flow of oil. But at what cost? The market, that cold, calculating machine, has already priced in a risk premium. Brent crude ticked up 2.3% in early trading, and gilt yields wobbled as investors sought refuge in the dollar. The irony is thick enough to cut with a knife: we are deploying expensive military hardware to protect a commodity whose price volatility is partly of our own making.
The Treasury, of course, will be sweating. Each uptick in oil prices feeds directly into inflation figures, which in turn puts pressure on the Bank of England to keep rates higher for longer. And higher rates mean more expensive government borrowing, just as the Chancellor tries to plug a fiscal black hole. It is a cruel feedback loop: tensions in the Gulf translate into higher yields on UK debt, which then crowd out productive investment. The City knows this. The bond vigilantes are sharpening their pencils.
But let us consider the alternative. If we do nothing, Iran's Revolutionary Guard might interpret restraint as weakness. They have already seized tankers, conducted provocative exercises, and inched closer to weapons-grade enrichment. A show of force, however expensive, may deter a broader conflict. The market, in its perverse wisdom, often prefers a known cost to an unknown catastrophe. That is why the FTSE 100 barely flinched at today's announcement. The index dipped 0.1%, a yawn in the grand scheme of things.
What really matters is the follow-through. Will the government finance this deployment through increased borrowing or by cutting spending elsewhere? Defence budgets are already stretched thin, and the Chancellor's fiscal rules are creaking under the weight of pandemic debt. Every pound spent on the RAF's Sentinel means a pound not spent on infrastructure, education, or healthcare. The great trade-off of statecraft is laid bare in the Strait of Hormuz.
For investors, the calculus is simple: short-term pain for long-term gain? Or is this the beginning of a protracted, costly entanglement that drains the Treasury and spooks capital? I would caution against complacency. Capital flight is a silent killer. If international investors perceive the UK as overstretched in foreign entanglements, they will demand higher yields to hold our bonds. That is a tax on every mortgage holder and business borrower in the country.
The real story here is not the RAF's deployment. It is the underlying fragility of the global oil market, the folly of energy dependence, and the unwillingness of politicians to wean us off the black stuff. Until that changes, we will keep repeating this tired dance: tensions spike, oil jumps, inflation bites, and the Bank of England mops up the mess. The Strait of Hormuz is just the stage. The play is as old as oil itself.
As for the gilt market, I am watching the 10-year yield like a hawk. If it breaks above 4.5%, we will have a problem. That is the line in the sand. For now, it holds. But the sands are shifting, and in the City, we know that tides can turn with alarming speed.
