What do rising oil prices mean for you?
The Iran war has kept oil prices high since the end of February, but could a ceasefire ease the financial pain? We explain what it could mean for your petrol costs and energy bills.
Dan McEvoy
The price of oil finally fell on 8 April after a two-week ceasefire was agreed between Iran and US, putting their war on ice for now, but whether prices will continue falling is unclear.
Oil prices have soared since the US and Israeli military strikes on Iran that began the war on 28 February. Prices were around $70 a barrel before the strikes, and climbed to around $110 by 7 April.
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Markets were calmed as the terms of the ceasefire said Iran must reopen the Strait of Hormuz, a critical waterway between Iran and Oman through which 20% of the world’s oil is transported. The strait has been shut since the conflict started, hitting the global supply of oil.
Why the conflict in the Middle East has impacted oil prices
There are two key reasons why the price of oil has increased due to the war.
The first is that the conflict is bad for business. A great deal of the world’s oil is harvested from countries near Iran and war in the region means it becomes much less safe and much more risky to continue normal operations.
In the first days of the war this was made very clear, as Iran fired retaliatory missile strikes on many countries in the Middle East, including the United Arab Emirates, Oman, and Cyprus, among others.
The second is that Iran was able to halt traffic through the Strait of Hormuz and hurt the world’s oil supply by effectively blocking 20% of it from being transported and stranding oil tankers in the Persian Gulf.
While the oil supply has reduced, the demand has remained the same, meaning the price of oil has increased.
Other goods are also impacted.
One example is fertiliser – around 30% of the world’s supply is shipped through the strait. Like in the case of oil, lower supply and steady demand have meant fertiliser prices have increased, which could lead to increased food prices later on.
Where prices go next will largely depend on whether ships are able to get out of the Persian Gulf during the current ceasefire, and how long shipping will be disrupted for
How does the oil price affect the price of petrol?
One of the most direct consequences of higher oil prices is the impact on what you pay at the pump, given that oil is vital in the manufacture of petrol and diesel.
Between 28 February and 10 April, the average price of a litre of petrol has increased by 25.3p, while diesel has increased by 48.9p, according to RAC Fuel Watch.
That is a significant increase, but it does not exactly mirror the extent that oil prices have risen in the same period.
This is because more than half the price of a litre of petrol is tax. Fuel duty accounts for around two fifths of what you pay at the pump, while VAT accounts for a further 17%.
One surprising benefit of being taxed so heavily on our petrol is that pump prices aren’t quite as sensitive to oil price increases as they are in other countries.
The price of the oil itself only accounts for 26-29% of the price of a litre of petrol in the UK. In theory, that means a 10% rise in global oil prices might increase the price of petrol by up to 3% (though it isn’t necessarily that straightforward in reality).
Rising oil prices could push UK petrol prices higher, though the impact is mitigated by the proportion of fuel prices accounted for by taxes.
Could higher oil prices increase inflation?
While petrol and diesel prices are some of the fastest to react to the increased price of oil, that does not mean they are the only costs that will increase.
Oil is used in the manufacturing process of many goods we consume each day. This includes goods as varied as plastic, crayons, shoes, backpacks, iPhones, pillows, and much more.
With oil being more expensive, we can expect these goods to also increase in price.
Economists are warning that the inflation associated with the impact of the war poses a threat to the UK economy.
The Bank of England said it expects inflation to reach 3.5% in the third quarter of the year due to the war, a projection that is echoed by Deutsche Bank.
Much of this increase will come from rising energy prices. These increased energy costs will not only affect households, but also businesses. Firms will likely hike their prices to make up for increased energy costs.
With inflation expected to rise again, most economists agree that it will be quite some time before we see the Bank of England cutting interest rates again.
Indeed, the market is currently pricing in interest rate hikes this year, though some economists say that while this is certainly much more of a possibility, it is more likely that the central bank will freeze rates for the foreseeable future.
Read more on the inflation forecast for 2026 in our guide.
Could higher oil prices increase your energy bill?
The conflict is expected to have a significant impact on the next Ofgem energy price cap.
Ofgem determines the price cap by working out the average wholesale price of energy in a three month period, and the observation period for the July price cap will include the war and its consequences on energy prices.
That means that even if the ceasefire lasts and a lasting peace is achieved, much of the damage to energy prices is already baked into the next price cap.
As such, the July to September price cap is expected to reach £1,871 per year – an increase of 14%, or around £230 per year, when compared to the current level in place between April and June, according to energy consultancy Cornwall Insight.
