The latest escalation between Israel and Iran has, counter intuitively, strengthened Tehran's negotiating position, sending shockwaves through British oil markets. The cost of Brent crude jumped 4% in early trading, reflecting genuine supply concerns from a region that produces over a fifth of the world’s oil.
A cynic might say that geopolitical risk is the only thing that gets the market’s attention these days, given the Bank of England’s dogged pursuit of inflation. But this is different. The Strait of Hormuz, a chokepoint for 21% of global petroleum, is now a potential flashpoint. The risk premium is real, and it is being priced in.
The government will no doubt be sweating. Every penny rise in fuel costs feeds directly into the Consumer Prices Index, and the chancellor’s fiscal headroom is already wafer thin. Higher petrol prices mean higher transport costs, higher food prices, and more pressure on the Bank to hold interest rates higher for longer. That is a recipe for recession, not growth.
Yet the real story is the asymmetric leverage. Iran, battered by sanctions and isolated, suddenly finds itself with a card to play. The threat of disrupting shipping lanes gives it a veto over global energy prices. Israel, meanwhile, has limited ability to retaliate without triggering a wider war that would further destabilise markets.
For British investors, the message is clear: diversify or die. The FTSE 100 may have a resilience in its mining and energy heavyweights, but the broader economy is vulnerable. Capital flight is already visible in the pound’s weakness against the dollar, a vote of no confidence in the UK’s ability to weather external shocks.
The bottom line? This crisis is a masterclass in how small players can use market volatility to their advantage. Tehran knows it. The City knows it. And unless the Bank of England starts paying attention to something other than wage data, we will all be paying for it at the pump.
