The markets rarely flinch at geopolitical ripples. But when the UN suspends evacuation operations in a waterway through which 20% of the world's crude flows, the City takes note. This morning's announcement that the Strait of Hormuz evacuation has been halted due to 'unforeseen security complications' has sent a tremor through gilt yields and left Westminster scrambling. The Royal Navy, we are told, stands ready. But ready for what exactly? A prolonged patrol operation that will inevitably add millions to the defence budget? Or a full-scale confrontation that could see oil prices spike faster than a tech stock in a bubble?
Let us dissect the numbers. Brent crude, already above $90 a barrel, could easily breach $120 if the Strait is effectively closed for more than a week. The last time we saw such a scenario, in 2019, insurance premiums for tankers quadrupled overnight. The Ministry of Defence, ever the black hole of fiscal discipline, will likely request an emergency top-up. And who pays? The taxpayer, of course. Meanwhile, the Bank of England, already wrestling with stubborn inflation, will have to factor in a supply shock that makes its 2% target look like a distant fantasy.
Then there is the capital flight. When uncertainty spikes, money moves. It flees sterling assets and seeks refuge in the dollar or gold. The pound, which has been trading in a narrow range, could see a sharp depreciation. That would further stoke import inflation, hitting consumers in the wallet. The government's borrowing costs, already elevated, would rise as gilt yields reflect higher risk premia. A vicious circle, if ever there was one.
And what of the Royal Navy's readiness? Splendid, no doubt. But the cost per hour of a Type 45 destroyer at sea is roughly £100,000. This is not a cheap show of strength. It is a fiscal drain that will be felt in the next budget. The Treasury must be sweating. They have already committed to eye-watering spending plans. An unplanned naval deployment is the last thing they need.
In the broader context, this crisis exposes the fragility of globalised energy markets. For years, pundits have banged on about energy independence. Yet here we are, dependent on a chokepoint controlled by a theocracy and its proxies. The market's inability to price in tail risks like this is a perennial failing. Today's news will force a reassessment, and that means volatility. For traders, this is a bonanza. For the rest of us, it is a reminder that the bottom line is never as solid as it seems.
The UN's decision to halt evacuations suggests a breakdown in diplomatic channels. That is never good for risk appetite. Expect a flight to safety: US Treasuries, gold, the Swiss franc. And expect the Bank of England to issue a soothing statement about monitoring the situation. But do not be fooled. There is no monetary policy fix for a physical supply disruption. This is about ships and guns, not interest rates.
To conclude, the Royal Navy's readiness is reassuring but costly. The halt in evacuations is alarming but not yet catastrophic. The key variable is time. Every day the Strait remains tense, the economic costs compound. The government must balance its show of force with a clear exit strategy. Otherwise, this could become another costly quagmire, paid for in higher inflation and lower growth. The bottom line, as ever, is that someone will pay. And it will not be the politicians who ordered the deployment.
