Chancellor dodges questions on whether her already-delicate spending plans will be smashed by Middle East crisis
Former BP boss Lord Browne warns oil prices will ‘go up a long way’ if Iran closes Strait of Hormuz
Former Chancellor Lord Hammond slams Reeves for not rebuilding Treasury reserves to handle economic shocks
UK deploying military assets to region to ‘protect ourselves’ and ‘potentially support allies’, Chancellor confirms
Fears are mounting about the economic impact of the Iran-Israel conflict today as Rachel Reeves admitted a 10 per cent spike in oil and gas costs and threats by Tehran to close the Strait of Hormuz were ’cause for concern.
In TV interviews this morning, the Chancellor attempted to downplay the crisis by stressing energy costs were still lower than ‘a few months ago’ – but conceded the potential fallout for UK plc was partly driving Britain’s desperate calls for de-escalation.
Ms Reeves conspicuously dodged questions on whether her already-delicate spending plans would be smashed by the crisis, insisting Britain has a ‘strong economy‘ even as experts warned of devastating consequences.
OIL PRICES ‘COULD HIT $125 A BARREL’
The Chancellor’s attempts at reassurance came as former BP boss Lord Browne delivered a stark warning that oil prices would ‘go up a long way’ if Iran shut the Strait of Hormuz – the critical chokepoint through which 20 per cent of the world’s oil flows.
Deutsche Bank has suggested that such action could see Brent crude hit a staggering $125 a barrel – compared to around $74 now, a catastrophic increase that would send shockwaves through the global economy.
Oil prices have already jumped 7% since Israel’s strikes on Iran began, with traders bracing for potential disruption to the 21 million barrels of oil that flow through the Strait of Hormuz every day.
REEVES UNDER FIRE FOR LACK OF RESERVES
Former Chancellor Lord Hammond delivered a stinging rebuke to Sky News, warning that the government was not in a good position to respond to serious disruption because Ms Reeves had not rebuilt the Treasury’s reserve.
The criticism highlights concerns that Labour’s massive spending commitments – including £29 billion for the NHS and billions more for defence – have left the government with no financial cushion to absorb economic shocks.
CHANCELLOR’S NERVOUS ADMISSION
Speaking to Sky News, Ms Reeves admitted: “We’ve already seen in the last few days, for example, oil and gas prices begin to go up. Over the course of this week, oil and gas prices, oil prices have gone up by just over 10 per cent, they’re still down compared to a few months ago but of course we’re keeping an eye on that.”
She added nervously: “And at the same time, as you say trade routes are very important through the Middle East and we’ve seen disruption there in the past, partly because of the Houthi attacks for example. And so that is a cause for concern.”
DODGING THE HARD QUESTIONS
When pressed on how catastrophic the situation could become for Britain’s economy, the Chancellor refused to give a straight answer, saying only: “It is very early days and things are moving quickly.
She attempted to link the crisis to her controversial spending review this week, claiming: “When we urge for de-escalation in the region that is in part because of the lives at risk… but also because what happens in the Middle East affects us here at home. It’s why in the Spending Review this week we invested heavily in our defence to keep our country safe.”
MILITARY ASSETS DEPLOYED
In a significant admission, Ms Reeves confirmed the UK is deploying military assets to the region to ‘protect ourselves’ and ‘potentially to support our allies’.
She noted that in the past Britain has ‘helped protect Israel‘ from ‘incoming strikes’, raising the prospect of British forces being drawn into the conflict if Iran attempts to close the Strait of Hormuz.
GLOBAL ECONOMIC THREAT
The Strait of Hormuz represents the most critical oil chokepoint on the planet, with Saudi Arabia, Kuwait, Iraq and the United Arab Emirates all dependent on the narrow waterway for their exports.
Goldman Sachs estimates that oil prices could blow past $100 a barrel if there is an “extended disruption” to the Strait, because such an event could prevent major OPEC producers from ramping up production.
JPMorgan analysts warned: “Sustained gains in energy prices could have a dire impact on inflation, reversing the months-long trend of cooling consumer prices” – a nightmare scenario for Western economies already struggling with cost-of-living crises.
IRAN’S NUCLEAR CARD
The crisis has already torpedoed diplomatic efforts, with Iran-US nuclear talks scheduled for Sunday now cancelled. Tehran has repeatedly threatened to block the strait in response to Western pressure over its nuclear programme.
Ed Hirs, senior fellow at the University of Houston, warned: “We can probably expect a temporary slowdown in oil tanker traffic through the Strait of Hormuz,” adding that Tehran has the capability to mine the waterway and attack tankers to disrupt traffic.
MARKET PANIC
The fear of wider conflict has already sent oil prices soaring to their highest level since March 2022, when Russia invaded Ukraine. Stock markets tumbled while gold prices surged as investors rushed to safe-haven assets.
OPEC’s secretary general pushed back on suggestions that emergency oil stockpiles might need to be released, insisting there are “currently no developments in supply or market dynamics that warrant unnecessary measures.
INFLATION NIGHTMARE
A spike in global oil prices threatens to reignite inflation just as Western central banks thought they had the problem under control. The Bank of England has already signalled fewer rate cuts than expected, and surging energy costs could force them to keep rates higher for longer.
This would be devastating for mortgage holders and businesses already struggling with high borrowing costs, potentially tipping the UK economy into recession.
REEVES’ SPENDING PLANS IN TATTERS?
The Chancellor’s ambitious spending review announced this week – promising billions for the NHS, defence, and infrastructure – was already based on optimistic growth projections.
With oil prices surging and the threat of wider conflict looming, those projections look increasingly unrealistic. Critics warn that Reeves may be forced to either slash spending or raise taxes even further to balance the books.
As one City analyst put it: “The Chancellor’s sums were already looking shaky. If oil hits $100 or more, her entire economic strategy could unravel.”
With British forces heading to the Middle East and oil markets in turmoil, Rachel Reeves‘ promise of economic stability looks more fragile by the hour.
“Reeves first speech (cropped)” — taken 8 July 2024 in London, United Kingdom, during Chancellor Rachel Reeves’s first speech on the UK economy at HM Treasury. Photo by Kirsty O’Connor / Treasury, licensed under the United Kingdom Open Government Licence v3.0 – https://www.nationalarchives.gov.uk/doc/open-government-licence/version/3/
