Escalation in the Middle East Crisis
European gas prices have surged by over 30 per cent as tensions in the Middle East continue to escalate. This comes after Donald Trump threatened to ‘massively blow up’ a major gas field in the region, amid fears of $200-a-barrel oil and long-term economic consequences.
Tehran has warned of a potential ‘full-scale economic war’ by increasing missile attacks on oil and gas facilities. Neighbouring Gulf countries have evacuated their facilities as the regime threatens strikes in the coming hours. This escalation follows an Israeli air strike on the world’s largest natural gas field, South Pars in Iran, which accounts for about 70 per cent of the country’s total gas production.
Trump claimed he was unaware of the attack but warned that if Iran continues to attack Qatar, he would retaliate with ‘an amount of strength and power that Iran has never seen or witnessed before’. A source familiar with the matter said the US was informed of Israel’s plans to strike the gas field but did not participate.
‘I do not want to authorise this level of violence and destruction because of the long term implications that it will have on the future of Iran,’ Trump stated on Truth Social, adding he ‘will not hesitate’ to strike back.
Iran’s attacks on Qatar continued, with liquefied natural gas facilities in the Ras Laffan industrial area set ablaze. Firefighters managed to put out the fire, but the damage was extensive. Production had already been halted due to earlier attacks, and the latest wave caused significant fires and further damage.
Oil prices rose by five per cent yesterday as markets reacted to Iran’s new leader declaring energy sites in Saudi Arabia, the UAE, and Qatar as legitimate targets. Eskandar Pasalar, an Iranian regional governor, declared, ‘The pendulum of war has swung to a full-scale economic war.’
Fuel prices for British motorists have reached their highest level in over 18 months. In response, Donald Trump authorised foreign-flagged ships to transport fuel to the US. Sir Keir Starmer warned that the longer the crisis persists, the worse its impact on the cost of living will be.
Further Developments in the Middle East
On another dramatic day in the Middle East:
- Iran’s new Supreme Leader Mojtaba Khamenei vowed revenge after several of the Islamic regime’s leaders were assassinated in US-Israeli bombardments.
- The World Health Organisation warned it is preparing for the possibility of nuclear weapons being used in Iran.
- The US Federal Reserve warned that the war could increase inflation and hit ‘disposable personal income’.
- At least 12 people were killed in Beirut as Israel intensified its bombing raids.
- The Ministry of Defence revealed that British pilots and gunners destroyed more than 40 Iranian drones.
Analyst Saul Kavonic from MST Financial highlighted the economic impact of potential escalations, stating that something that takes out a few million barrels of production would have a significant effect. He added that striking an LNG facility would be the worst scenario, as repairs could take years.
The Royal Navy has declined to send warships to the Middle East due to the fluid situation. A drone attack on Kuwait’s Mina Al-Ahmadi refinery sparked a fire but caused no injuries. The refinery, one of the largest in the Middle East, has a petroleum production capacity of 730,000 barrels per day. Shortly after, a drone attack set ablaze the nearby Mina Abdullah refinery.
Authorities in Abu Dhabi were forced to shut down operations at its Habshan gas facility and Bab field, calling the Iranian overnight attacks a ‘dangerous escalation’. Qatar, Saudi Arabia, and the UAE all condemned the Iranian attacks, with Saudi Arabia’s top diplomat stating that assaults on the kingdom had shattered any remaining trust.
Yesterday’s attack on the Pars gas field marks the first reported strike on Iranian energy infrastructure since the war began. Iran accuses Gulf states of allowing US forces to conduct attacks from their territories and has launched a fresh salvo of missiles, including one that struck an airbase housing British and Australian troops in the UAE, while others hit Riyadh.
This situation adds to fears of an energy supply crunch, which is already being described as the biggest ever, surpassing the 1970s oil crisis. The closure of the Strait of Hormuz, through which a fifth of the world’s oil and gas passes, has choked off up to 10 million barrels of oil a day. This has sent oil prices surging from $72 before the war to nearly $110, prompting Iran to warn the world to prepare for $200 a barrel.
Danni Hewson, head of financial analysis at A J Bell, noted that Iranian threats of retaliation against regional energy infrastructure after Israeli strikes on its massive South Pars gas field have increased market volatility. She added that any solution to the blockage of the Strait of Hormuz looks distant, and energy markets are likely to remain volatile unless progress is made.
International Reactions and Economic Impacts
President Trump stoked the international war of words by threatening to abandon the security of the Strait of Hormuz shipping lane for countries, including the UK, that had failed to respond to his demand for warships to secure the waterway. He claimed such an action ‘would get some of our non-responsive “Allies” in gear, and fast!’
In a post on his Truth Social platform, he taunted European nations: ‘I wonder what would happen if we… let the countries that use it – we don’t – be responsible for the so-called “Straight?”‘
As oil prices rose, the White House announced a pause in the Jones Act, which requires goods to be moved on US-flagged vessels. This law has been blamed for making energy more expensive, and the 60-day suspension allows foreign-flagged ships to transport goods, including fuel.
At Prime Minister’s Questions, Sir Keir defended his approach, insisting he would not allow UK forces to be drawn into a ‘wider war’. He has resisted Trump’s demands for the Royal Navy to deploy to the strait. The UK has sent air defence destroyer HMS Dragon to help defend Cyprus from drones and missiles, but the vessel is making slow progress.
The US has ordered a ‘911 force’ of 2,500 marines to be redeployed from Japan to the Middle East, indicating the possibility of American soldiers’ boots on the ground in Iran. Iran’s deputy foreign minister called this a ‘reckless’ move and stated that his country would fight for as long as needed.
Meanwhile, the RAC reported that the average price of a litre of petrol has climbed by 10p to nearly 143p since the start of the war. Diesel prices have risen by 20p to nearly 163p. Government borrowing costs also rose as investors dumped UK bonds, known as gilts. Bonds across the world have been affected by the Middle East turmoil, but Britain’s are seen as especially vulnerable due to its high inflation among G7 economies.
Traders are also concerned about the possibility of a government bailout for household energy customers, similar to subsidies provided during the Ukraine war. Thomas Pugh, chief economist at RSM UK, said that combined with the country’s weaker economic backdrop, this makes Britain more vulnerable to shocks than many comparable countries.
