The Iranian threat to oil supplies is overblown
Oil and gas still matter. For all the talk of net zero and the growing share of renewables in electricity generation, hydrocarbons remain crucial to the global economy.
Back in 2005, oil accounted for 37pc of the world's primary energy consumption, with gas generating 23pc. The same numbers are now 31pc and 24pc respectively – still hugely significant, with the world's reliance on natural gas as an energy source actually up over the last 20 years.
Oil remains vital across numerous sectors, not least transportation – think trucks, aviation and shipping – and the manufacturing of industrial chemicals, plastics and asphalt among vital materials. Gas still generates around a quarter of the world's electricity and is used to make fertiliser – sorely needed to grow enough to feed a fast-expanding global population.
We're often told – usually with an eye on geopolitical realities, because hydrocarbons are predominantly found in 'awkward countries' – that the world is less dependent on oil than at the time of, say, the 1973 oil price shock.
Back then, the crude price spiked four-fold in under a year after the Arab world embargoed energy exports from the Gulf during the Israel-Egypt Yom Kippur war.
The world used 55m barrels a day in the early 1970s but over 100m now, with demand set to rise significantly into the 2030s and beyond. Oil – and gas – remain absolute necessities to any form of modern life, across a fast-industrialising world.
Yes, the UK used 2.2m barrels daily half a century ago, and that's fallen to 1.4m now – in part due to efficiencies and renewable energy, but mainly because our manufacturing sector has shrunk from over a fifth to less than a tenth of our economy.
Moreover, North Sea operations are now much diminished, not least because of punitive taxation and endless net zero regulation – so Britain is a net oil and gas importer.
With both these vital hydrocarbons trading on global markets, we're particularly vulnerable to price spikes, losing out twice – paying more for our supplies without gaining the profits and extra taxation reaped by energy exporters when prices are high.
I mention all this, of course, because the escalation of military hostilities between Israel and Iran, while causing yet more death, displacement and destruction across the Middle East, poses economic dangers too. Amidst the terrible human fallout, a spiking oil price threatens to reverse a fragile global recovery.
From mid-January to early May, Brent crude fell from $81 (£60) a barrel to $61 – a 25pc drop – as a sluggish global economic outlook slowed projected energy demand. That combined with concerns that Donald Trump's tariff onslaught from early April would further stymie global trade.
Over recent weeks, though, as this Israeli-Iranian conflict has intensified, Brent crude has spiked back up to $75, largely due to fears of turmoil engulfing the Middle East
Tehran, specifically, has threatened to close the Strait of Hormuz, at the mouth of the Persian Gulf, a critical route for 25pc of global oil and liquefied natural gas (LNG) flows daily. Were that to happen, oil would soar above $100 a barrel and way beyond – doing serious damage to oil importing nations, not least the UK.
Even if that doesn't happen, the International Monetary Fund reckons a 10pc rise in oil prices raises inflation in advanced economies by about 0.4 percentage points – and we've seen a 20pc-plus rise over the last month. UK inflation, 3.4pc in May, could easily soar above 4pc and beyond – twice the Bank of England's target.
Stand by for higher UK petrol and diesel prices, along with domestic gas price rises too, especially if the conflict disrupts LNG exports from Qatar and elsewhere in the Gulf. That will push up household and industrial bills, with knock-on effects on food prices too – with food price inflation already jumping from 3.4pc in April to 4.4pc in May.
Such inflationary pressures would rule out any more cuts in the Bank of England's policy rates for the foreseeable future. Bond yields would also rise – not least on UK sovereign debt – compounding the difficulties of this big-spending Labour government to stabilise the public finances.
Renewed cost of living crisis headlines would also increase risks of a damaging wage-price spiral, with the UK's public sector unions already squaring up for more conflict this autumn.
And these trends would intensify, of course, if Hormuz closes – which Iran could do by using its submarine fleet to lay deep sea mines between its southern coast and Oman, a distance of 25 miles at the Strait's narrowest point.
Other oil producers (not least US frackers) can offset the disruption of Iranian supplies – the country pumps 4pc of global production – but not supplies from the Gulf as a whole.
The reality is, though, that Iran relies heavily on oil exports – and closing the Strait would starve an unpopular government of the revenues needed to keep a lid on domestic discontent. And with 85pc of the energy leaving Hormuz consumed on Asian markets, thwarting those flows would alienate neutral powers such as China and India.
Iran would think hard before alienating these two in particular, which would rally international support against Tehran, strengthening regional rival Saudi Arabia.
Attempting to close the Strait would also risk devastating military and potentially civilian losses for Iran, including its naval and coastal assets, if the US and powerful Gulf states engaged in sustained retaliation.
But the main reason I don't think Iran will disrupt Hormuz is that Tehran gains more by threatening to close the Strait than by actually doing so. The mere threat of action can drive up oil prices, benefiting Iran's economy and strengthening Tehran's negotiating position, without risking the consequences of action.
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