LONDON: The price of Brent crude was hovering around the $70 per barrel mark when the Iran war began in late February. Since then it has spiked all the way up to $126, dropped back to around $70 and yo-yo’d everywhere in between. Between Tuesday and Thursday, as tensions in the Red Sea racked up, it surged from $97.92 to $107.63. On Friday, it fell back slightly to about $105, but at that price UK consumers will feel the impact in several ways. Peter Dixon, senior economist at the UK-based National Institute of Economic and Social Research, said the immediate effects would be on the price of petrol and diesel — additional costs that would be felt not only at the pumps, but also across the economy, as hikes in fuel prices hit production and transport costs. And for the UK it all comes at a difficult moment. “While this would not recreate the scale of the 2022 energy shock, it would be sufficient to complicate the UK’s disinflation process,” he said. “The timing is particularly awkward because real household disposable income growth is already expected to be close to zero in 2027.” He added: “Renewed inflation impulse from energy markets would erode purchasing power, potentially pushing real income growth back into negative territory for the first time since 2022. “In practical terms, households would face a squeeze from both higher fuel bills and a gradual increase in the prices of everyday goods and services.” Normally, high prices would benefit oil-producing countries, but not as things stand. Iran’s de facto closure of the Strait of Hormuz, together with an uptick in Houthi attacks against vessels in the Red Sea, has made itself felt. “Given current constraints on oil exports from the region, hydrocarbon-exporting economies in the Middle East and North Africa are not experiencing the economic boost that they typically would get from high oil prices,” said Phil Kenworthy, senior economist for the World Bank’s Prospects Group. Consequently, the impact of fluctuating oil prices is also making itself felt at the household level across the region. Kenworthy told Arab News that this was being more acutely felt by lower-income households which, he said, “typically face greater exposure to energy and food price shocks. “Hydrocarbon-importing economies in the region face major challenges from a sustained surge in oil prices, especially those already grappling with macroeconomic vulnerabilities such as elevated inflation, volatile currencies, or persistent current account deficits,” he added. “In some economies price hikes can be attenuated by subsidies, but these come at the cost of worsening fiscal pressures.” Subsidy-induced fiscal pressures are one of the hidden costs that MENA governments will be having to grapple with as they work out how to respond to yet another fluctuation in the price of oil. Part of the problem is that these pressures are measured differently, presenting a potential longer-term structural threat to economies. For MENA countries, Kenworthy said, it is worth bearing in mind that economies exist in widely varying fiscal circumstances, with no one economy the same. For those economies where the fiscal space is perceived to be strained — which he said would be reflected in a number of metrics, including weaker credit ratings — there remains the very real risk that any elevated subsidy costs would add strain to government budgets. Kenworthy said this could “worsen investor perceptions and, in turn, could lead to higher debt-service burdens and tighter domestic financial conditions. “More broadly, there is a risk that expensive subsidies, once established, become difficult to phase out when a shock passes.” Obviously, this may influence how governments choose to respond and is just one of the myriad ways that the rise in oil is affecting MENA households. “There are multiple channels by which an oil price shock can transmit into broader domestic prices, which vary according to economic structure and policy frameworks,” said Kenworthy. “Most directly, higher energy prices raise input costs for a wide range of goods and services via, for instance, increased transportation costs — and these may be passed through to consumer prices, especially if a cost shock is sustained. “In addition, domestic currencies can come under pressure in response to weakening terms of trade in energy importers, which may pass through into higher prices for imported goods. More generally, a price shock that destabilizes domestic inflation can exert upward pressure on inflation expectations.” Inflationary shocks are also being considered in the UK. Approached for comment, the Bank of England said that it does not provide running commentary on the state of the oil market. However, in its most recent Monetary Policy Review, in July, it acknowledged that there was “a risk that the recent rise in energy prices results in additional inflationary pressure through second-round effects, requiring a response from monetary policy to ensure inflation does not remain persistently above the two percent target.” Dixon raised the issue of inflation, warning that were oil prices to linger above the $100 per barrel mark for too long, it would “raise the risk that inflation breaches 4 percent in the early months of 2027.” Businesses in the UK appear cognizant of this. Dixon noted that, as things stand, “second-round effects (from price rises) remain conspicuous by their absence so far.” He put this down in part to the “limited willingness or ability” of businesses to simply pass higher costs through to consumers, but added that this reflected a general weakness in the demand conditions together with intense competitive pressures. “Wage growth is also slowing, reducing the risk of a broader inflationary feedback loop,” he continued. “That said, if oil prices remained elevated for several quarters rather than several weeks, indirect effects would become more important. “Higher transport, logistics, freight and input costs would gradually feed into food prices, manufactured goods and some service-sector prices. “As it is, there is already potential for higher food price inflation due to climatic effects — a factor which could be exacerbated by the impacts of higher transport costs and higher fertilizer prices.” Rod Dennis, senior policy officer for UK motoring organization the RAC, said that with oil having jumped by $6 overnight, the result was to be expected; wholesale fuel prices, especially for diesel, would continue their “upward march.” Average UK prices at the pumps are now 168.46p a liter for petrol and 190.08p for diesel, although Dennis said the RAC expects diesel to “hit a new US/Iran war high within days.” Both fuels, he said, “have increased by 7p since just the start of the month, adding £3.85 to the cost of filling a typical family-sized car, heaping more pressure on household budgets.” It does, he added, “still pay to shop around. Supermarkets are currently 4p cheaper on average, at around 164p for petrol and 186p for diesel, while some independent forecourts are charging less than 158p for a liter of petrol.” Mitigation measures may be available, but should businesses change strategy UK households will find themselves exposed on multiple fronts to that potential for inflationary shock — a shock that could hit mortgage-holders hard. Mortgage rates are particularly sensitive to financial shocks, and borrowers on a flexible rate can find their finances suddenly hit hard. Also, anyone embarking on a mortgage with a fixed rate, could find themselves stuck with a high rate for two or more years — even if the variable rate falls back after they’ve signed on the line. The markets delivered a classic example in the UK in 2022. That year began with the average two-year fixed rate at 2.38 percent. By Sept. 22 it had climbed to 4.7 percent. But a day later the disastrous “Truss budget“” — “an own-goal if ever there was one,” a mortgage broker told Arab News — triggered a frenzy that saw rates soar to as much as 6.65 percent. “Since then, they have not really recovered,” the broker added. “We saw them dip below 5 percent at one point last year, but realistically, you’re looking at above 5 percent for most two-year deals.” And should higher inflation become a real issue — affecting food, mortgages and transport — Dixon said that the Bank of England would “face a series of difficult choices,” with “at least” one rate rise a possible response. “For households, the consequence would be a longer period of restrictive borrowing costs putting upward pressure on mortgage rates,” he added. “The combination of higher borrowing costs and higher energy prices would continue to squeeze real incomes, which will do nothing to ease the cost-of-living squeeze.”