Oil prices hit $100 a barrel for the first time since May, as the escalating conflict in the Middle East reignited fears over global energy supplies. Brent crude, the global benchmark for oil prices, rose more than 6 percent on Thursday, following several days of gains as the US stepped up military strikes against Iran.
Prices spiked after Houthi militia in Yemen attacked oil tankers in the Red Sea, threatening a key export route Saudi Arabia has used to bypass the Strait of Hormuz. Gas prices have also climbed steadily over the past month, with the benchmark UK gas price now sitting around 150p per therm, up from roughly 98p at the end of June.
From Ceasefire to Renewed Escalation
Oil prices had been falling following a temporary ceasefire between the US and Iran, dropping back to levels last seen before the US and Israel began military action against Iran on February 28. However, that ceasefire has since collapsed, and this week US Secretary of State Marco Rubio said Iran’s leadership was “not ready to make a deal.”
Why Rising Oil Prices Threaten Inflation
The ongoing conflict risks pushing up inflation for many countries, including the UK and the US, leading to higher prices for consumers. Higher oil prices typically make petrol and diesel more expensive. While drivers feel the impact directly, households could also see the prices of other goods, such as food, rise as businesses pass on higher transportation costs to customers.
Inflation has fallen in both the UK, down to 2.6 percent in the year to June, helped by slowing diesel and petrol prices, and in the US, down to 3.5 percent. Questions remain, however, over whether that slowdown will prove short-lived given the renewed conflict in the Middle East.
Pump Prices Already Climbing
New data released Thursday showed UK petrol prices have risen by 5p a litre since the start of July, reaching almost £1.56. Diesel now averages £1.72 a litre, according to the RAC.
In the US, average gasoline prices have surpassed $4 a gallon once again, up from $3.92 a month ago, according to motorist advocacy group AAA.
“More expensive fuel and energy can ripple through the wider economy, increasing costs for businesses and ultimately feeding through into the price of food and other goods,” said Jonathan Raymond, investment manager at Quilter Cheviot. “This creates another headache for central banks as they continue their battle against inflation. If energy prices remain elevated, policymakers may come under pressure to keep interest rates higher for longer or even raise them. This would come as a blow to mortgage holders and borrowers already feeling the strain.”
Central Banks Watch Closely as Rates Stay on Hold
The Bank of England, which sets UK interest rates, has held them at 3.75 percent across its last four meetings. Paul Dales, chief UK economist at Capital Economics, said he believes the Bank will almost certainly hold rates again, though analysts still expect a cut next year if energy price rises ease.
Kevin Warsh, the newly appointed chair of the US Federal Reserve, told Congress last week that the central bank had “no tolerance to persistently elevated inflation.” President Donald Trump had previously pushed Warsh’s predecessor, Jerome Powell, to cut interest rates, and has made clear he expects Warsh to deliver reductions in borrowing costs for Americans.
Despite that pressure, the Fed held US interest rates between 3.5 and 3.75 percent at Warsh’s first meeting last month. He also told Congress he remained committed to restoring price stability in the wake of the Middle East conflict’s impact on prices.
