Fuel prices and energy costs are anticipated to increase, coinciding with a rise in inflation, as the oil market continues to escalate due to the long-anticipated turmoil in the Middle East.
On February 28, a series of joint air strikes by the US and Israel against Iran, coupled with the assassination of the nation’s supreme leader Ayatollah Ali Khamenei, triggered a surge of escalating conflicts across the region.
Impact of Middle East Conflicts
A significant portion of the world’s oil supply comes from the Middle East, and ongoing conflicts in the area pose a risk to global distribution. This situation has led to a surge in fuel prices in the short term.
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Increased fuel prices can swiftly impact your budget, even if the turmoil is occurring far from your location.
Rising Energy Costs
“Fuel prices serve as the primary mechanism through which geopolitical developments can influence inflation, affect economic growth, and shape central bank policies,” stated John Husselbee, the head of multi-asset investments at Liontrust.
What has caused the surge in oil prices after the onset of the conflict, and how might this impact inflation in the UK, interest rates, and the cost you incur at the fuel station?
The influence of the Middle Eastern conflict on fuel prices
Inflation and Oil Market
On Monday, March 2, futures prices for Brent Crude oil started at $78.37 per barrel, reflecting an increase of 8.1% from the previous Friday’s close on February 27, and peaked at $80.26 during the trading session.
In addition to increased global instability, a significant risk that the conflict presents to the world economy is the possible shutdown of the Strait of Hormuz, a narrow maritime route connecting the Persian Gulf to the Gulf of Oman, through which approximately one-fifth of the globe’s oil flows, impacting fuel prices.
It seems that this situation has already unfolded. Reports indicate that Iran’s Revolutionary Guards have announced restrictions on shipping through the strait and have allegedly claimed responsibility for attacks on three tankers from the UK and the US on Sunday.
Expert Insights on Financial Trends
“From a worldwide standpoint, nearly everything depends on the Strait of Hormuz and the consequences of any disruption to global fuel prices,” stated John Wyn Evans, head of market analysis at the wealth management firm Rathbones. “Current oil prices already incorporate a significant risk premium, suggesting an anticipation of a limited yet substantial interruption to shipping; however, analysts warn that the effects would escalate rapidly if the closure were to extend.”
In what ways does the price of oil influence the cost of fuel prices?
One of the most immediate effects of rising oil prices is their influence on the amount you spend at the fuel station, as oil is the primary component in gasoline and diesel.
Nonetheless, the effect may not be as significant as you might assume (especially if you reside and drive in the UK). This is due to the fact that over half of the cost of a litre of petrol is made up of taxes. Fuel duty represents about 40% of the total amount you pay at the fuel station, while VAT contributes an additional 17%.
A surprising advantage of our high petrol taxes is that fuel prices tend to be less affected by fluctuations in oil prices compared to other nations.
In the UK, the cost of crude oil contributes only 26-29% to the total price of a litre of petrol. This implies that a 10% increase in global oil prices could potentially raise petrol prices by as much as 3%, although the actual impact may be more complex.
Increasing oil costs may lead to a rise in petrol prices in the UK, although this effect is lessened by the share of taxes in fuel pricing. (Image credit: Chris J. Ratcliffe/Bloomberg via Getty Images)
If the inflationary effects mentioned earlier persist, they will influence the Bank of England’s decisions regarding interest rates.
An ongoing rise in inflation could create significant challenges for both policymakers and consumers, potentially hindering plans for further interest rate reductions in the UK, according to Chris Beauchamp, the chief market analyst at the investment platform IG.
A significant oil supply crisis could trigger a worldwide slowdown in economic activity. “In the scenario of a global oil shock, the consequences would encompass rising inflation and a decline in various economic indicators, particularly industrial output where fuel prices play a crucial role,” stated Samy Chaar, chief economist and CIO Switzerland at Lombard Odier.
Ways to safeguard your finances against rising fuel prices
Although there is not much you can do to shield yourself from the likelihood of increased fuel prices at the pump (other than possibly opting for an electric vehicle), there are measures you can implement to safeguard your investments against any potential inflation linked to oil and the broader consequences of the ongoing conflict.
Gold is frequently regarded as a safeguard against inflation, making it a viable option to consider adding to your investment portfolio if you haven’t done so already. Following the onset of the conflict, gold prices surged to nearly record levels, bolstered by its reputation as a secure asset.
Husselbee from Liontrust emphasizes the necessity of a well-rounded multi-asset portfolio that offers varied exposure across different regions, sectors, and asset classes. However, he also warns against impulsive adjustments to your investment strategy based on current news headlines.
