During the cost-of-living crisis energy prices were a major pinch point. The outbreak of war in Ukraine in February 2022 triggered a surge in global energy and commodity costs. Motorists may recall the average cost of UK petrol and diesel prices was briefly in the 180s / 190s (pence per litre) in the summer of 2022. Apart from a period of increases between July and October last year which included the steepest monthly rise (in August) for UK drivers in 21 years, forecourt prices have largely followed a downward trajectory. Indeed, average UK petrol prices fell in each of the last 12 weeks of 2023. As we start 2024 petrol and diesel prices are down over 50 pence per litre, or more than a quarter, below their 2022 highs. Filling up a car with fuel is back below pre-Ukraine invasion levels (Feb-22) with the price of a litre of petrol / diesel currently in the 130s /140s.
‘Supply chain disruption’ was the phrase economists and non-economists became all too familiar with after the pandemic. Whether it was delays in purchasing a new car or trying to source garden furniture. According to some metrics, shipping costs increased sevenfold relative to pre-pandemic levels. 2023 saw global supply chain disruptions – and shipping costs – normalise back below pre-pandemic levels. That ‘normalisation’ has been short-lived. The escalation of the Middle-East conflict, particularly attacks by Iranian-backed Houthi rebels on container ships navigating the Red Sea, has meant ‘supply chain disruption’ is making a comeback in 2024. A leading index of container freight rates for a typical 40ft shipping container has increased by 60% since Christmas. While freight rates are still only one-quarter of their post-pandemic peak they have hit their highest level since mid-November 2022.
Historically, conflict in the Middle-East has led to oil price surges such as in the 1970s. But the world today is not as reliant on oil and gas from the Middle-East as it once was. Energy price rises have been modest since these latest attacks. Indeed a barrel of Brent Crude oil is currently around $78/79 per barrel – almost $10 per barrel below the level following the terrorist attacks in Israel on 7thOctober.
What happens next if we see a further escalation in the conflict? Some 12% of global trade travels through the Red Sea. Concern is likely to focus more on supply-chain disruption and rising shipping costs rather than energy prices. Diverting European ships from Asia around Africa adds an extra 3,200 miles and an additional 9 days travel time. This will be passed onto consumers and businesses in the form of higher costs. Advances in technology, such as drone warfare (low cost and highly effective) has lowered the barrier of entry for terrorists / states to disrupt trade. From that perspective, we are arguably now in a new era of global trade disruption.
