Gas prices have spiked and stock markets indexes tumbled after an Iranian official said his country would “set fire” to anyone trying to pass through the key Strait of Hormuz shipping route.
As the conflict between Iran and the US and Israel continued, the UK gas price surged by more than 46%, following sharp gains on Monday pushing it to it highest price for three years. Brent Crude Oil climbed by more than 5% to just over $81 a barrel.
In the UK, the FTSE 100 index fell by 2.6% while stocks markets in France and Germany also dropped.
Investors are weighing the impact of the conflict on the global economy including what it could mean for inflation and interest rates.
There are fears rising prices could have a similar impact to Russia’s full-scale invasion of Ukraine four years ago which pushed up the cost of energy, causing prices rises for businesses and consumers around the world.
UK gas prices rose to over 165p a therm on Tuesday which it last traded at less than a year after the start of the Ukraine war.
The price of gas leapt on Monday after QatarEnergy, one of the world’s biggest exporters, halted production following “military attacks” on its facilities.
It subsequently announced that it would stop producing other materials including aluminum and methanol.
UK gas prices have now doubled since the US and Israel began a wave of air strikes on Iran on Saturday.
Higher gas prices could put pressure on household energy bills, although any impact would not be seen in the UK until July because a price cap has been put in place until then.
At the same time, rising oil prices can affect the economy by making things such as motor fuel, transport and food more expensive.
If inflation - the pace of price rises - picks up, then this may make central banks less likely to cut interest rates in the months ahead.
In the UK, the FTSE 100 dropped 2.6% on Tuesday. Germany’s Dax fell by 3.7% while in France, the CAC-40 slid by 3%.
Ebrahim Jabbari, an adviser to the commander-in-chief of Iran’s Islamic Revolutionary Guard Corps (IRGC), told state TV that ships “should not come to this region. They will certainly face a serious response from us”.
Shipping through the Strait of Hormuz is crucial to the global economy, with about 20% of the world’s oil and gas passing through the waterway. But they have come to a halt after several vessels were attacked in recent days.
As well as pushing up prices on global energy markets, the conflict has triggered a rise in how much it costs to transport oil.
Hiring a supertanker to move oil from the Middle East to China reached an all-time high on Monday of more than $400,000 (£298,300) per day, almost double the cost last week, according to data from the London Stock Exchange Group.
Sanne Manders, president of logistics technology platform Flexport, told the BBC the Strait of Hormuz is “effectively closed”.
It is partly down to carriers not willing to take the risk, but also due to “insurance companies not being willing to insure this risk anymore”, he told the Today programme.
He added that carriers were likely to start raising rates “for any shipping in the world” in anticipation of higher fuel prices.
Crude oil prices could pass $100 a barrel if the disruption to shipments is prolonged, Srinivaasan Balakrishnan from risk research firm Avellon Intelligence said.
He predicted that if it held at that level US petrol prices could rise by up to 25 cents a gallon.
US President Trump is facing concerns that the conflict in the Middle East could push up the cost of living.
He is scheduled to meet Treasury Secretary Scott Bessent and Energy Secretary Chris Wright on Tuesday to discuss the issue.
Secretary of State Marco Rubio said Washington would announce plans to deal with rising energy prices.
“We knew that going in would be a factor,” Rubio said. “Starting tomorrow you will see us rolling out those phases to try to mitigate against that.”
The UK is also likely to see higher fuel prices if the cost of oil remains high, according to Alasdair Locke, chairman of Motor Fuel Group, the UK’s largest independent forecourt operator.
“With the price of oil going up, that is inevitably going to feed through in due course to higher prices at the pump,” he said.
“It will depend on how long and how high those prices go as to how high the price of fuel will be.”
In Asia, Japan’s Nikkei closed 3.3% lower, with shares in export‑reliant firms like Toyota, Panasonic and Sony among the hardest hit.
Hong Kong’s Hang Seng and the Shanghai Composite in mainland China were also down. The Kospi in South Korea, which was shut for a public holiday on Monday, fell by more than 7%.
Source: BBC