How the Iran War Is Hitting the UK Economy

Britain doesn't import a single drop of Iranian oil. And yet, according to the OECD, it is one of the worst-hit economies in the world. On February 28th, the US and Israel launched Operation Epic Fury. Within hours, oil markets panicked. Brent crude surged from $72 to over $112 a barrel in a matter of weeks. Iran blockaded the Strait of Hormuz, the waterway through which 20% of the world's oil flows, and prices kept climbing. Goldman Sachs estimates traders are paying a $14 risk premium per barrel just to account for uncertainty. Britain is especially vulnerable because most of its electricity comes from gas-fired power plants. Gas is traded on global markets, which means its price moves with oil. When Iran blockaded the Strait of Hormuz, Qatar halted LNG exports entirely. Global gas prices nearly doubled. British electricity prices followed. The war didn't need to touch Britain directly. It just needed to touch the global gas market. France generates most of its electricity from nuclear plants. The US is a major oil exporter. Both were cushioned. Britain, which cannot produce enough gas domestically, was not. The Bank of England was widely expected to cut interest rates this spring. It didn't. Governor Andrew Bailey warned that inflation would not fall to its 2% target as previously forecast. Surging energy costs push up prices across the whole economy. That is cost-push inflation, driven not by excess demand but by a supply shock Britain cannot control. Raising rates won't fix a blockaded strait. But cutting them risks letting inflation embed. So the Bank holds, and the economy waits. UK inflation is now forecast to breach 5% in 2026, the highest projection for any major European economy. When inflation stays high, consumer spending falls, business investment slows, and growth stalls. The OECD cut Britain's 2026 growth forecast by more than any other developed nation. Retailers say costs are rising. Farmers are warning of food price increases from next month. Clothing chain Next warned prices could climb 10% by year end. Every policy response comes with a catch. Britain's public debt stands at 93% of GDP. In 2022, the government spent £120 billion shielding households from the Ukraine energy shock, a sum that took years to borrow and will take longer to repay. Capital Economics estimates Reeves could deploy roughly half that this time. Drilling more in the North Sea sounds intuitive, but new production takes years to come online, and oil from the North Sea sells at global market prices regardless. It would not insulate Britain from the next shock any more than it has insulated it from this one. The deeper problem is that Britain relies on a fuel whose price is set by conflicts it did not start, at facilities it does not own, through straits it cannot unblock. That was true before February 28th. It will be true long after the war ends. The solution has been obvious for years. Wind and solar have no fuel costs. As Christine Figueres, former head of the UN's climate body, put it: clean energy has "a predictable cost of zero for fuel." There is no pipeline and there is no chokepoint. Global gas prices spiking because of a war in the Persian Gulf is simply not a problem that affects you if your electricity is not tied to global fossil fuel prices. Ed Miliband called the war "another reminder that the only route to energy security is to get off our dependence on fossil fuel markets whose prices we do not control." That is not an environmental argument. It is an economic one. The risk is that Britain responds, as it did after Ukraine, by patching rather than replacing. After 2022, Europe doubled down on LNG imports from the United States, handing Donald Trump enormous leverage over its energy policy. The same choice is available again. Britain is not a direct combatant in this war. But a single airstrike thousands of miles away has stalled rate cuts, driven up bills, and pushed inflation back toward 5%. Every year the transition is delayed is another year of paying that price. Britain has been running up that bill too long.