Global Energy Prices Surge Amid Middle East Tensions and Houthi Attacks

Global energy prices have seen a significant increase, with oil prices climbing above $108 per barrel, a nearly 50% rise since June. This surge is largely attributed to the escalating conflict between Yemen's Houthi rebels and Saudi Arabia, which has disrupted oil and gas supplies. The wholesale price of natural gas has nearly doubled in the UK and Europe since July, leading to concerns of a potential inflationary shock for the global economy.

This trend is impacting consumers directly, with average petrol prices in the UK exceeding 170p per liter, the highest since 2022. In the US, the cost of a gallon of petrol has risen to $4.32, while diesel prices have reached a record high of over $6 per gallon. The energy regulator Ofgem forecasts a 25% increase in the domestic price cap in January, translating to an approximate £440 annual rise for typical households.

What's Pushing Up Prices?

Analysts point to a reduction in global energy supplies as the primary driver. Before the recent escalation of hostilities, a significant portion of global oil products and liquefied natural gas passed through the Strait of Hormuz. However, this flow has been hampered by ongoing tensions. Saudi Arabia's East-West pipeline, which reroutes oil to the Red Sea to bypass the Strait of Hormuz, was forced to shut down after a drone attack, an act Saudi Arabia attributes to Iran-backed militias. Simultaneously, Houthi forces have attacked Saudi oil facilities, causing temporary operational halts.

The Bab al-Mandab Strait, another critical chokepoint in the Red Sea, has also seen increased disruption due to Houthi advances. These developments raise concerns that these vital shipping arteries could face further disruptions.

While the US has suggested the Russia-Ukraine war is the primary cause of rising diesel prices, many analysts believe the expanding regional conflict in the Middle East is the more significant factor behind the recent energy price spike. The International Monetary Fund (IMF) has estimated that a sustained 10% increase in oil prices can raise global inflation by 0.4% and reduce global GDP growth by up to 0.2%. The Bank of England has made similar assessments for the UK economy.

However, a potential de-escalation or a peace agreement between the involved parties could lead to a decrease in oil prices. A preliminary deal between the US and Iran in June previously led to a sharp, albeit temporary, fall in oil prices from highs of $120 a barrel.