The White House has confirmed a second wave of airstrikes on Iranian military targets in as many days. The news sent Brent crude above $120 a barrel this morning, a level not seen since the 2008 financial crisis. For those of us who remember the oil price spikes of the 1970s, this feels like a grim rerun.
Let’s be clear: this is not about geopolitics. This is about the bottom line. The US administration, facing domestic headwinds and an election cycle, has chosen the nuclear option both literally and figuratively. But the market is not stupid. It sees a widening conflict in the Strait of Hormuz, through which 20% of the world’s oil passes. Insurance premiums for tankers have tripled overnight. The risk of a full-blown supply disruption is now priced in.
Whitehall is, predictably, in a flap. The Chancellor will hold an emergency Cobra meeting this afternoon. But what can they actually do? The UK’s strategic petroleum reserves are at their lowest in decades, thanks to the previous government’s sell-off to balance the books. We have no fiscal wiggle room. The gilts market is already twitchy; a 30-year yield above 5% is now a distinct possibility. That will feed straight into pension liabilities and mortgage rates.
The Bank of England faces a devil’s trillema. Inflation is already above target. A sustained oil price spike will push it towards 10%. Raise rates to curb inflation, and you crush what’s left of consumer confidence. Cut rates to stimulate growth, and you wave goodbye to the pound. The only certainty is capital flight. International investors are already rotating out of sterling-denominated assets. I expect gilt yields to gap higher at the open.
The market’s message is clear: this military adventurism comes with a price tag. And it’s not the Americans or the Iranians who will foot the bill. It’s the British motorist at the pump, the pensioner with index-linked savings, the manufacturing firm with energy-intensive processes. The Treasury can talk about ‘shockwaves’ all they like. The real shock is that they are surprised.
We have been here before. In 1973, the Yom Kippur War and the subsequent oil embargo sent the West into a decade of stagflation. The parallels are uncomfortable. The difference this time is that we have less fiscal firepower, a more globally interconnected financial system, and a central bank that is already out of ammunition.
As a financial editor, I don’t deal in hysteria. I deal in data. And the data suggests we are heading for a correction. Not just in oil, but in bonds, equities, and eventually GDP. The only question is how deep and how long.
So, while the politicians posture and pundits opine, I’ll be watching the futures markets and the Bank of England’s next move. Because in the end, the market always wins. And right now, it’s screaming sell.
