The deal between America and Iran to end the four-month war in the Middle East brings with it the prospect of an end to the economic turmoil which has seen the price of items – from petrol to foreign holidays.
At the heart of the expected signing on Friday of the agreement with Tehran is the quid pro quo for Gulf countries, and the rest of the world, that would be the reopening of the Strait of Hormuz – the maritime choke point whose closure has throttled a substantial portion of the world’s supply of oil, gas and other vital commodities.
The unblocking of the strait, behind which at least 1,250 vessels have been trapped since the war began on 28 February, would restore a sea route which had carried about a fifth of the world’s oil supply, including about 40 per cent of Europe’s jet fuel.
The result is a potential reversal of months of bad news for British consumers, bringing with it falling fuel prices and an easing of supply chain constraints. As Donald Trump put it on his Truth Social platform on Sunday: “Ships of the World, start your engines. Let the oil flow!”
But experts warn a deal is far from guaranteed, not least because while the memorandum of understanding with Tehran ends any attempt by Iran to charge a toll on the Strait of Hormuz, it technically only does so for the 60 days in which a permanent peace is supposed to negotiated.
How quickly – and permanently – will the Strait of Hormuz reopen?
This is the $600bn – the annual value of trade through the strait – question surrounding the putative deal to be signed in Switzerland on Friday.
As Neil Shearing, the chief economist at City-based analysts Capital Economics, put it: “It remains to be seen whether the deal with Iran represents a fragile truce or durable settlement.”
Experts say a return to anything approaching pre-war trade levels in the Persian Gulf will take a minimum of a month to 45 days, and could possibly take much longer if operations to clear mines laid by the Iranians prove tricky.
Saleem Khan, chief analytics officer with shipping data firm Pole Star Global, pointed out that previous openings of the strait in April and May had seen most ships and their owners wait for confirmation that the sea route is reliably open before attempting voyages.
He said: “The least risk-averse owners will take advantage of the opening soon after it happens, but the majority will wait for confirmation on mine clearance, insurance and other sources before they begin to transit.”
Petrol prices – pump prices set to fall
Just as rocketing prices for petrol and diesel have been the most obvious consequence of the Iran crisis, so too are there grounds for expecting that a fall in what drivers pay at the pump will be among the first dividends of a reopening of the Strait of Hormuz.
Motoring organisation the RAC said it expects the price of petrol to fall from its current average of 156p per litre to 148p within the next fortnight, and diesel to similarly fall from 177p to below 160p.
Along with other experts, it noted that falls last week in the price of crude in anticipation of the agreement between Washington and Tehran had already provided the circumstances for forecourt prices to fall.
Petrol prices are set to fall substantially within the next fortnight, according to the RAC. (Photo by Alishia Abodunde/Getty Images)The question remains of when, or even if, the costs being borne by motorists will return to their pre-war levels of 132p for petrol and 141p for diesel, based on an oil price of $70 per barrel.
According to an RAC analysis, the Iran crisis has cost UK drivers a little over £4bn in higher fuel costs. At the same time the Treasury has netted an additional £670m in VAT above and beyond what it would have received if prices had remained as they were.
Uncertainty over the rate at which oil shipments will pass through the Strait of Hormuz and the likelihood of enduringly raised shipping insurance costs mean there is an expectation in markets that a return to a $70 oil price will not happen quickly, if at all.
As one analyst put it: “Consumers should be prepared for slow relief as inflationary pressures continue to ripple through supply chains.”
Food prices – baked-in inflation
While much of the focus of the ramifications of the closure of the Strait of Hormuz has been on oil and gas, the impact on commodities such as fertiliser has been just as severe.
Roughly a third of global fertiliser needs, in particular ammonia and urea, passes through the Persian Gulf and its interruption has forced growers around the world to either seek alternative supplies at higher prices or simply use less of the chemicals vital to maintain agricultural yields.
In Britain, farmers have had to deal with a rise in fertiliser prices of between 50 per cent and 70 per cent, hitting greenhouse and arable operations. The result is that what is grown is costing more to produce and there may be less of it.
A further problem is that while fluctuations in oil prices tend to be reflected in consumer costs within a fortnight, the effect on food prices takes longer to manifest itself and tends to be more enduring.
Governments rushed to secure supplies of critical crop nutrients ahead of spring planting. (Photo: Rory Doyle/Bloomberg via Getty Images)Consequently there are concerns that food inflation will rise steadily in the coming months and hit nine per cent by the end of the year.
Forgione said: “Long-term contracts mean higher input costs for energy, freight and raw materials will keep working their way through the system for months ahead. Food prices lag because of planting and harvest cycles, so we are likely to see elevated pressures well into 2027.”
Air travel and holidays – look out for bargains
The fact that roughly a fifth of global aviation fuel supply – and about 40 per cent of that required by Europe – originates in the Persian Gulf led to concerns early in the Iran war of swingeing price rises and even shortages imperiling summer holidays.
While airlines have indeed cut schedules and increased the cost of tickets – by an average of 25 per cent according to one analysis – the doomsday scenario of summer getaway cancellations due to fuel availability is now not expected to materialise.
This has been due to an ability of European carriers and governments to rapidly source alternative supplies of jet fuel, in particular from the United States and West Africa.
But experts warn that the resumption of supplies from the Gulf will not precipitate a fall in ticket prices.
The war in Iran brought warnings that UK airlines could be hit by fuel shortages. (Photo: Getty Images)Bryan Terry, managing director of Alton Aviation Consultancy, a specialist analysis company, said: “The uncomfortable truth for the traveller is that good news from the Middle East doesn’t automatically translate into cheaper flights any time soon… Refilling the physical pipeline of jet fuel in Europe will take months, not weeks.”
That is not to say, however, that cut-throat competition in the aviation sector will not result in bargain seats becoming available for some destinations as carriers seek to fill excess capacity.
Terry said a returning sense of “optimism” in the sector is likely to see some carriers dashing to capitalise on a return of demand by restraining or cutting prices to gain passengers.
From gadgets to paracetamol – the other goods likely to stay pricey
The Iran conflict has also had ramifications for a range of obscure products which are nonetheless vital ingredients for everyday goods and services from medicines to consumer durables.
Experts have warned that the loss of helium supplies from Gulf countries, where Qatar alone provided as much as 38 per cent of global production, will have impacts on a number of high-tech sectors.
The gas, which is a byproduct of liquified natural gas (LNG) production, is vital for MRI scans in healthcare, where it is used for cooling superconducting magnets, as well as playing a key role in the manufacturing of semiconductors or microchips.
There are also problems with the price and availability of some medicines. Pharmacies have reported price rises of up to 30 per cent for common remedies such as paracetamol and hay fever tablets, as well as interruptions in supplies of other products such as aspirin and co-codamol.
This is due to the interruptions of supplies from the Gulf of petroleum-based chemical precursors vital for some medicines and rocketing air-freight costs for manufacturers, in particular India’s large generic drug industry.
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