A fragile peace agreement between Iran and the US has been brokered, but its economic reverberations are far from resolved. Signed on 18th June, this latest development aims to quell hostilities that have been wreaking havoc on global markets since February. The conflict's centre of gravity lies in a region crucial for oil and gas supplies, forcing the closure of the critical Strait of Hormuz shipping corridor and sending shockwaves through international trade. While the strait is now set to reopen, negotiations on more contentious issues – including Iran's nuclear programme – have been postponed for 60 days, leaving uncertainty surrounding the deal's longevity and its full economic impact.
The most immediate effect of this conflict has been felt at UK petrol pumps. Following the outbreak of hostilities, motor fuel prices surged due to disruptions in oil production and transport in the Middle East. Although prices have begun to fall in recent weeks, reflecting hopes for a peace deal, they remain significantly higher than pre-conflict levels. According to RAC Fuel Watch data, as of Thursday, the average price for petrol in the UK was 154.72p per litre and diesel 174.30p per litre – a substantial increase from 132.05p for petrol and 141.6p for diesel nearly four months ago. Simon Williams, head of policy at the RAC, notes that sustained falls in global oil prices should eventually lead to lower pump prices; however, he questions their speed compared to the rapid increases seen in March and April.
The impact on household heating bills is less clear-cut. UK gas prices almost doubled at the conflict's outset, prompting concerns about higher energy costs. Although the benchmark UK gas price has dropped to 98p per therm from a peak of 157p in March (compared to under 80p before the war), experts like Cornwall Insight caution against expecting an immediate return to pre-conflict levels. Moreover, the energy regulator Ofgem has already set its next price cap for household energy bills for July, which cannot be altered. This means the average household bill is still projected to increase by 13%, or £221 annually, from next month, affecting 33 million households across England, Wales, and Scotland.
Airfares are another sector where prices may remain elevated. Europe sources approximately half of its jet fuel from the Gulf region. Jet fuel prices initially soared from around $784 per tonne to $1,838 following the war's commencement. While prices have since fallen sharply to about $967 a tonne, Amaar Khan, a jet fuel specialist at Argus Media, believes the aviation industry is not yet out of the woods. He anticipates that European airlines will have sufficient fuel for the summer and beyond, but also expects jet fuel prices to remain above pre-war levels for a significant portion of the year, potentially keeping flight costs elevated for holidaymakers.
Beyond specific commodity price fluctuations, it's worth considering broader macroeconomic trends influencing household finances. The UK's decision to freeze VAT on domestic energy supplies until March 2024 will provide some respite from rising energy prices; however, the overall economic uncertainty surrounding this peace deal may continue to affect consumer spending and business confidence.