Oil prices jumped by more than 2 per cent today following UK and US air strikes on targets linked to the Yemen-based Houthi rebels.
Both countries described the move as an act of self defence to stop attacks on ships travelling through the Red Sea.
Continued attacks by Iran-backed Houthi rebels on ships in the area have forced several shipping companies to divert around Africa, extending journeys by up to two weeks.
Supermarkets have already admitted that the latest escalation could lead to price increases on food. Experts now explain how they could impact fuel and energy prices too.
What could the crisis mean for energy prices?
Oil prices had ticked up in response to the last 24 hours, rising by 4 per cent after the strikes in Yemen with Brent crude hitting $80 per barrel for the first time this year.
However, gas and electricity prices have remained subdued due to relatively mild weather across Europe and high gas storage levels on the continent.
Dr Craig Lowrey, principal consultant at Cornwall Insight, an energy analysis consultancy, said: “Liquefied natural gas (LNG) vessels are bypassing the Red Sea, but as we are currently well-supplied by US cargoes through the Atlantic market, the immediate impacts on UK and European prices are limited.
“This supply situation is also being helped by the fact that Asian LNG prices are also low due to mild weather and good availability in the region.”
But what if the situation were to change? The energy price cap set by the energy regulator Ofgem sets a limit on the unit rate that suppliers can charge consumers. It is updated every three months and is not due to be renewed until April. So until then, at the earliest, prices will remain as they are for the majority of households.
The April price cap, which will be announced next month, is also unlikely to be affected hugely be events in the next few weeks either.
“The April price cap has already been mostly priced in by this point in time and is clearly forecast to reduce against the January cap as wholesale prices have decreased over the period,” said Tony Jordan of energy strategy firm Auxilion.
“The July price cap will then start pricing from late February, and is based on whatever the UK wholesale market is doing,” he said.
However, Dr Lowery said if the crisis were to escalate and affect wholesale markets, its immediate impact would be on the pricing of fixed tariffs.
Some of these are currently priced below the price cap, and lock in costs for a year or more. These could become more expensive straight away, if wholesale costs were to rise.
What could the crisis mean for fuel prices?
The Treasury has reportedly modelled scenarios if the conflict continues. This includes crude oil prices rising by more than $10 a barrel as well as 25 per cent increase in natural gas, the BBC said.
It comes amid reports the Government is concerned that the continuing attacks on shipping in the Red Sea could weigh on the UK economy.
Despite this, UK fuel prices are currently at their lowest level in two years.
Callum MacPherson, head of commodities at Investec, has suggested that the overall impact on the price of oil, and its knock on-effect on fuel prices, “might not be dramatic”.
“If it takes 15 extra days to sail around the Cape of Good Hope, the longer route, rather than going through the Suez Canal, the extra cost is $0.75 per barrel,” he said.
“Freight rates are likely to go higher still if more oil is diverted around the Cape, but this calculation suggests that the overall impact on the price of oil might not be dramatic. In any case, the Suez Canal is not as vital for crude oil as it used to be as crude from the Middle East now tends to go east to Asia rather west through the canal. The largest crude carriers do not fit through the canal anyway,” he added.
Experts have said that even if prices for suppliers go up, retailers could choose not to pass this on, and operate with smaller margins, as the current profits they are making are high.
Simon Williams of the RAC told i: “Retailer margins remain high, so if prices do rise, these margins could be squashed – so consumers won’t necessarily see an increase in the costs at the pump.
“Oil prices still remain around $80 per barrel [they were above $90 in October last year, after the start of the conflict between Israel and Hamas], so what happens to the margins depends on what happens to these longer term.”
Should the conflict extend wider and impact further areas of the Middle East, the impact on prices remains to be seen.
