The tergiversations of Britain’s inflation rate this year have been frequently surprising – with last week’s news of price increases holding steady at 6.7 per cent the latest unexpected addition to the story.
Nonetheless, the general trend has been downwards, towards the halcyon halving that Rishi Sunak and Jeremy Hunt have erroneously been aiming to take credit for since January. Unfortunately for them, the evolving war between Israel and Hamas may scupper their chances of hitting at least one of their five pledges.
Discussion of the economic consequences of a dispute between Israel and its enemies naturally turns thoughts towards the 1973 oil embargo prompted by the Yom Kippur War. Oil prices quadrupled in a year, inflation surged, and Edward Heath’s government buckled under the strain. Could the global economy be about to do a Sam Tyler?
The historical record suggests not. As Philip Pilkington has highlighted, in the five major conflicts which Israel has fought since the Six Day War of 1967, only two – the Yom Kippur War and a 2012 intervention in the Gaza Strip – have brought increases in oil prices. In 1973, that was a rise of almost 135 per cent. In 2012, it was only 10 per cent.
Moreover, today’s world is much less dependent on oil and has a greater diversity of suppliers. The US is now a net petroleum exporter. Israel itself is not an exporter of oil. If the conflict remains small-scale and focused on the Gaza Strip, the global economic impact is likely to be minimal.
Yet the obvious fears are ones of escalation. Intelligence analysts watch wearily as to Hezbollah and Iran’s next moves; commentators mutter darkly about a Third World War. The price of a barrel of Brent crude recently jumped by 7.5 per cent on world markets based on the fear that the conflict might hit global supplies. That relies on the actions of Iran and Saudi Arabia.
Joe Biden’s recent efforts to improve relations with Iran – aided by us in paying the Danegeld for Nazanin Zaghari-Ratcliffe – have meant the United States turning a blind eye to Iran’s oil exports in the hope of improved diplomatic relations and subdued oil prices. Consequently, Tehran has increased production by somewhere between 500,000 and 700,000 barrels per day this year.
Whilst Iran’s direct involvement in the attacks remains unclear, its clear support means that any chance of playing footsie with the Americans again soon is off the table. US sanctions will both be enforced and likely increase. That could mean Iran reducing production. According to Goldman Sachs, Brent crude’s price increases by $1 for every 100,000 barrels of Iranian oil that leaves the market.
Similarly, Washington had been hoping that Saudi Arabia would be willing to increase oil production this year as part of a deal involving Riyadh recognizing Israel in return for US security guarantees, weaponry, and assistance in developing a domestic nuclear programme. This would be a reverse of its current attempt, with Russia, to cut exports to boost prices.
Hamas’s attacks have greatly reduced the chance of such a deal being signed in the near future. Even if it was, Iran would likely retaliate, both economically and militarily. Prices could spike from current levels of around $91 a barrel to $100 and beyond. The IMF believes a 10 per cent rise in oil prices would increase global inflation by about 0.4 percentage points.
Iran also has the potential to disrupt global gas prices. Prices are at their highest level since February already as markets are concerned about increased demand this winter. Israel is a small gas exporter, sending out about a twelfth of what Norway managed last year. Nonetheless, when it suspended production in the Tamar gas field following the violence, European prices surged by over 10 per cent.
But the bigger worry is if Iran is drawn into the conflict and chooses to disrupt the flow of liquefied natural gas through the Strait of Hormuz. This channel lies south of Iran and is used to transport around a quarter of the world’s natural gas supply. Closing the Strait would have consequences for global gas prices comparable to the disruption caused by the Russia-Ukraine war.
Naturally, the sum total of these potentialities for Britain’s economy is somewhat suboptimal. October is currently expected to see a big reduction in inflation based on the falling energy price cap. If energy prices spike, that process will naturally be reversed. Inflation could increase again.
In which case, the Bank of England – which had hoped to slow, cease, and then reverse interest rate rises – might be forced to postpone any end to the tightening interest rates. Increases in energy costs would see food prices rise. Higher interest rates and reduced spending power would make a recession increasingly likely. Global growth is slowing.
The sum total of all this (hypothetical) doom and gloom is to make one fact abundantly clear: Hunt’s wiggle room for tax cuts this Autumn is shrinking. If the Middle East situation worsens, the economy slows further, and borrowing becomes even more expensive, the chances of the Party’s tax-cutting posse getting egg on their faces grows ever larger.