Conflict and energy prices

What’s happening

Conflict in the Middle East has expanded in the last week, with Israel and Iran engaging one another. Oil and gas facilities on both sides have been damaged.

Global oil prices rose in response, but at the time of writing they have fallen back slightly.

Price responses to this conflict have not yet matched those seen after the Russian invasion of Ukraine.

What it means

Facilities have been damaged on both sides, but the situation in Iran is most critical. Iran has large reserves of oil and gas. It is one of the biggest exporters in the world despite sanctions.

Almost all of Iran’s energy exports go to China, so businesses in the UK and Europe are not directly exposed.

However, if China cannot be supplied by Iran it will need to source energy from other sources, which may push global prices up.

Energy prices also tend to rise when there is any major economic or geo-political event, especially in the Middle East.

In addition to market effects, Iran is in a position to threaten shipments of energy and goods via the Persian Gulf, if it chooses to – it has done so before.

By working through allies, it is also able to threaten shipping via the Red Sea and Suez Canal. Again, this has happened before.

So, far there is no sign that neutral shipping has been targeted, but shipping companies are naturally risk-averse and tend to avoid areas of conflict, even if it means taking a longer route.

IGD opinion

Geo-politics is identified by IGD as the second-biggest threat to the UK food system, (climate change is first).

Modern food and drink production is energy intensive. Rising energy costs can contribute to inflation in this market, or – in extreme cases – limit supply.

Market prices for energy in the UK seem to be under control – high but not spiking. For now, IGD does not anticipate major inflationary effects, but this could change if the conflict spreads or drags on. Closing the Persian Gulf could cause prices to surge, because so much of the world's oil passes this way.

Most businesses protect themselves from short-term energy price fluctuation by making fixed price supply deals.

These can be helpful, if the deal is struck at the right price – some were caught out by making a deal at a high price in 2022, only to see prices fall significantly soon after.

For the long-term, however, the real solution is to diversify energy supply, moving away from fossil fuels and towards other sources.

This is a major effort, requiring significant capital investment. This, in turn, requires a robust policy framework.

We have seen evidence of this, most recently in the Spending Review 2025, which committed the government to developing new nuclear energy production, but this could still be years off.