Iran is threatening to block the Strait of Hormuz, the narrow shipping lane in the Gulf which about 20 per cent of global oil exports and liquefied natural gas (LNG) flows through.
It could also disrupt international trade and push up the cost of goods and services.
Chris Wheaton, analyst at Stifel, said that a global scramble to secure LNG could push up European wholesale gas prices.
“In a UK context, that would mean a UK energy price cap of £3,00 to £4,500 a year, which would be economically and politically disastrous, in our view.”
The 2022 energy crisis saw Ofgem’s price cap increased to £2,500 for the average household. It is much lower now at £1,849 per year and it will fall to £1,720 next week.
Goldman Sachs has also warned about potential disruption to global energy supply.
This is a significant increase from the current level of 3.4 per cent and way above the Bank of England’s two per cent target.
What would be the impact on petrol and diesel?
Simon Williams, the RAC head of policy, said: “As retailer margins have been high for some time, the oil price rise has squeezed these to fairer levels for drivers.
However, he said it is important to note that the oil price is a long way off the $137.72 seen in the early days of the Ukraine war in spring 2022 which led to average prices reaching record highs in the summer of 191.5p for petrol and 199p for diesel.
Capital Economics said that a closure of the Strait of Hormuz could result in the oil price rising to $130 to $150 per barrel. Generally speaking, higher oil prices lead to higher petrol and diesel prices at UK forecourts.
With the Strait currently open, Russ Mould, investment director at AJ Bell, said “Oil and gas prices are staying very calm, all things considered, and the gains in the immediate aftermath of the American bombings in Iran are perhaps more muted that you might have expected.
Investment bankers Goldman Sachs also flagged risks to global energy supply amid concerns over any potential disruption of the Strait, warning that would lead to significant spikes in oil and natural gas prices.
What actions could the Government take to mitigate?
If oil prices rocket as high as feared as a result of the conflict in the Middle East the Government could theoretically take a VAT holiday on fuel to help motorists, or cut fuel duty, currently at 52.95p, the level it has been since being reduced in 2022.
The Department of Transport said it also hopes to have the ‘fuel finder’ scheme which will allow drivers to compare real-time fuel prices, via navigation apps, in-car devices and comparison websites, up and running by the end of this year, subject to legislation and parliamentary time.
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