How The War With Iran Impacts The Real Economy

By the time you read this Trump may have decided the war in the Middle East is over. I sincerely hope that’s the case — not just for the sake of the many lives at stake there, although that is clearly the main concern overall. But if it isn’t, you might as well tear up your marketing plan for this year and any thoughts you had on the next.

As Mike Tyson said, ‘Everyone has a plan until they get punched in the mouth’. The UK economy, already punch drunk from the global economic crisis, the pandemic, and the war in Ukraine, can’t take another blow. That’s the real economy, the economy that impacts on the lives and livelihoods of millions of our people.

If something doesn’t change fast, once more businesses and marketers will witness their lack of agency when supply chains are blocked, margins are squeezed, inflation ravages the nation and customers are in real pain. Because if you hadn’t realised it yet, business is about economics and economics is about politics.

This is a war that the UK didn’t want, hasn’t sanctioned and isn’t participating in. And yet if it lasts much longer it will have a profound effect on our lives because of a piece of water called the Strait of Hormuz, which lie between Iran and the Gulf States.

The Strait of Hormuz, through which 20 per cent of the globe’s oil and gas moves, are currently closed. No one has a contingency plan for this because the strait is so vital to every potential combatant in the region, it has been assumed any closure would be over in a few days. It’s now been over a week.

At the time of writing nothing is getting in or out of the Strait. This isn’t simply because Iran is threatening shipping that does pass through it. Lloyd’s list reports that last Thursday the Strait, the Gulf of Oman and the Middle East Gulf were all designated ‘Warlike Operations Areas’ under tanker crew contracts while tanker insurance premiums have increased between two and four times. If you can’ t insure a ship and the crew have the right to refuse to sail in a designated war zone, it doesn’t matter how many ships the US offer to escort, the oil is not coming out. This means storage is filling up and when it does production will have to stop. Qatar has already ceased LPG production. If the strait does reopen the disruption will take some time to resolve, and if it remains closed, we know what happens next.

The price of oil and gas will surge, oil hit $120 a barrel this week before slipping back under $100, but this is way ahead of the pre-war price of between $60 and $70. Gas prices are following the same pattern, hanging on every social media ejaculation from the President.

The price of oil is important to us because oil is in everything and transports almost everything. This price hike will map directly onto domestic inflation. Gas is important because as the most expensive part of our electricity mix, all our electricity is priced at the value of gas, not far cheaper renewables that we are use most of the time.

The energy price cap will protect people and businesses from gas price rises, but the current cap ends in July.

The result of this will be profoundly inflationary making our businesses less competitive and our lives more expensive. The last time oil was $100 a barrel in July 2022, when inflation reached 10 per cent and then went higher. It clearly came down to more manageable levels and allowed wages to catch up but that process will go rapidly into reverse.

If there is the merest whiff of inflation the Bank of England, which has been cautiously reducing interest rates, will start trying to use them to combat price rises.

This will have no effect whatsoever because inflation is no longer created by excess consumer spending but by increased supply chain costs. That won’t matter because the Bank of England will have to be seen to do something about the situation so at that point, we should expect increases in the base rate and for the cost of mortgages and then rents to start more rapidly rising again. This delivers a double whammy to people – high inflation and high interest rates.

And so it is that we are catapulted back to 2022, except this time our people and businesses have fewer savings, and less resilience. This will spell political disaster for this Government, an economic cataclysm for the country and a terrible future for our people and businesses.

So, for the people of Iran, the people of the Middle East, the people of this country I genuinely hope that when you read this, the war has stopped and the strait is open. It's impossible to quantify how much is at stake otherwise. 

Richard Huntington is the founder of marketing consultancy Feral.