London's trading floors lit up this morning as crude oil futures jumped more than 5% following President Trump's latest bellicose warning to Iran. The Brent benchmark breached $80 a barrel for the first time this quarter, sending shivers through the gilt market and raising the spectre of stagflation for an already fragile British economy.
Let us be clear: this is not your garden-variety geopolitical spike. The premium built into crude futures today reflects a genuine fear that the Strait of Hormuz could become a shooting gallery. Trump's tweet, threatening 'obliteration' if Iran targets US assets, was precisely the kind of rhetorical escalation that traders dread. Iran has already demonstrated its willingness to disrupt shipping, and the British Navy is stretched thinner than a penny stock prospectus.
For the UK, the math is brutal. Every $10 increase in oil prices adds roughly 0.3% to inflation and shaves 0.2% off GDP growth. We are currently wrestling with core inflation stuck above 3% and a Bank of England that seems paralysed by indecision. A sustained oil shock would push CPI back towards 5%, forcing the Monetary Policy Committee into a painful choice: hike rates and crush what little growth remains, or hold steady and watch inflation expectations become unanchored.
The gilts market has already priced in the worst. The 10-year yield spiked 15 basis points this morning as investors demanded higher compensation for inflation risk. The yield curve is now flatter than a City boy's martini, signalling that the market expects recession to follow this bout of price pressure. Capital flight is already visible, with the pound sliding 1% against the dollar as foreign investors question the wisdom of holding sterling-denominated assets.
What about our energy security? The government's much-vaunted renewables push is a long-term hedge, but today we are reminded that hydrocarbons still power this economy. The North Sea is in terminal decline, and our storage capacity is laughable compared to continental peers. One rogue missile in the Gulf and we could be looking at rationing by Christmas. The Treasury's contingency plans are rumoured to be based on a 'worst case' of $100 oil. We are now halfway there.
The fiscal arithmetic is equally grim. Rishi Sunak's fiscal headroom has already evaporated thanks to higher debt service costs. A prolonged oil spike would force either deeper spending cuts or higher taxes, neither of which is politically palatable. The Chancellor will be praying that this is a brief tantrum, not a structural shift.
Of course, the market could be overreacting. Trump has a habit of bluffing, and Iran has so far shown restraint. But the options market is pricing in a 30% probability of military escalation within three months. That is not a risk premium any prudent investor can ignore.
So here we are: oil surging, sterling sagging, and the spectre of 1970s-style energy crises looming. The only question is whether the Bank of England will be brave enough to tighten into this mess or whether they will join the MPC's history of being behind the curve. My money, for what it is worth, is on the latter. Prepare for higher petrol prices, higher heating bills, and a long, cold winter for the Treasury's credibility.
