The collapse of nuclear negotiations with Iran has sent a jolt through global energy markets, with Brent crude surging above $95 a barrel for the first time in three months. For the UK economy, already labouring under persistent inflation, this is the last thing we needed. Motorists face fresh pain at the pump, and the Bank of England’s inflation hawks will be sharpening their talons.
The breakdown of diplomatic efforts in Vienna leaves the world bracing for potential supply disruptions, and the City is pricing in the risk of a wider Middle East conflagration. Gilt yields have risen sharply as investors flee risk assets, and sterling has taken a hit against the dollar. The fiscal arithmetic for the Treasury is deteriorating: higher energy costs mean less consumer spending, lower GDP growth, and a widening deficit.
The irony is that the very policies meant to insulate Britain from such shocks, like the energy price cap, merely delay the inevitable. Market efficiency demands that prices reflect reality, and the reality is that the global oil market remains dangerously tight. With OPEC+ already struggling to meet production targets, and Russian barrels under sanctions, the loss of Iranian supply could push prices into triple digits.
For households, this means another squeeze on real incomes just as the cost of living crisis shows signs of easing. The Bank must now decide whether to hold rates or risk a wage-price spiral. The hard truth is that the era of cheap energy is over, and the UK economy is structurally exposed.
The market, as always, is indifferent to political narratives. It sees the numbers, and they are not pretty.
