From jet fuel to fertiliser

A quiet Easter Sunday was abruptly punctured when US President Donald Trump unleashed a brutal, expletive-filled ultimatum to the Iranian regime.

In a post on Truth Social, Trump wrote: “Tuesday will be power plant day, and bridge day, all wrapped up in one, in Iran.

“There will be nothing like it!!! Open the f***in’ strait you crazy b***ards, or you’ll be living in Hell- JUST WATCH!”

The president’s latest ultimatum comes as countries around the world face the grim realisation that the economic effects of the Iran war will be profoundly negative and sustained.

Western countries have been relatively shielded from the crisis of the closed Strait of Hormuz waterway, with the most visible evidence of the closure being seen in rising petrol and diesel prices at the pump.

While drivers of the UK’s four million diesel vehicles are no doubt feeling the pain, the impact of has been more acute in the far East.

Asian economies that are more heavily reliant on oil imports are facing a more pressing challenge, with South Korea president Lee Jae Myung urging citizens to save “every drop of fuel” last week.

Meanwhile, Pakistan has implemented a mandatory four-day work week, while people in Thailand have been told to cut down on air conditioning in a bid to reduce the amount of energy consumed.

But while Western economies have so far avoided major shortages or talk of rationing, things could be about to change. Even if Iran decided to comply with Trump’s most recent demands, the cycle would remain disrupted for a significant period of time.

Fuel dries up

Trump’s explosive anger over the closure of the strait comes down to the fact that roughly a fifth of the world’s oil is transported through the waterway, and since the Iranians effectively shut it down on 2 March prices have surged.

Despite Europe receiving less oil from the Gulf states, a global deficit will pull the continent at loggerheads with Asian countries who have been severely affected by the shortage, such as Japan and South Korea.

Stiff competition from Asian buyers looking to secure more valuable barrels elsewhere will most likely continue to push up prices for European buyers, according to analysts.

Brent crude prices hit $108.6 (£82) on Monday, with prices up 24.4 per cent over the past month with petrol and diesel prices also spiralling out of control.

According to the RAC, petrol prices have reached an 18 month high in the UK, but rising prices also signal looming shortages.

The International Energy Agency has also released a 10 point action plan last month, which could be “implemented quickly” by governments, businesses and individuals, while the European Union has urged member states to encourage citizens to work from home and drive less to reduce demand.

Summer holiday blues

It’s not only the prices at the pump that will be affected, with summer holidays also facing potential disruption.

The outlook for the travel industry seems bleak, with the IATA’s jet fuel monitor showing a barrel of jet fuel costs $195, an 103 per cent rise from $96, eight days before the war broke out.

Europe imports roughly 20 to 30 per cent of its total jet fuel demand from the Gulf, and with the last few tankers that left the region before the war now arriving, airline bosses have been warned that a situation where there will not be enough for scheduled flights is fast approaching.

Ryanair chief executive, Michael O’Leary warned that the budget airline may need to cancel 10 per cent of its flights this summer as we enter this “unknown scenario”.

Meanwhile, regional airline Skybus announced its flights between Cornwall Airport Newquay and London Gatwick would be abruptly cancelled starting from April 2, crediting the cancellations to “circumstances beyond our control”.

This points to the possibility of wide-spread summer holiday cancellations if no solution is found, with some postponing travel plans while others are debating cancelling pre-booked trips.

Feeling it at the dinner table

If the conflict runs into early summer, the strain on global prices will be damaging and oil prices are likely to continue to soar. Worst case scenarios point to barrel prices far north of their current highs in the absence of a meaningful ceasefire.

But food prices will also feel the heat, with a leading food association warning prices could rise from three per cent to nine per cent by the end of this year.

The Food and Drink Federation upgraded its food inflation forecast from its September prediction of 3.2 per cent, to between nine and ten per cent.

Food and drink manufacturing is particularly vulnerable to the supply chain and fuel price shocks because it is one of the UK’s most energy intensive and dependent on imports.

Meanwhile, British exporters of products which are popular in the Middle East, like cereals, chocolate, and biscuits, have already had shipments paused and even cancelled due to the conflict, according to the FDF.

Elsewhere, the cost of farm machinery power fuel, red diesel, has also surged by 80 per cent since the start of the conflict over one month ago.

Away from oil, the choking of fertiliser in the strait also poses a threat to the global food supply.

The Gulf states account for 49 per cent of globally traded urea, a nitrogen-rich fertiliser used for a variety of crops, including wheat.

The price of urea has rocketed more than 40 per cent since the outbreak of the war in Iran, with the cost spike arriving during spring planting season for farmers across the Northern Hemisphere, meaning the effects are likely to trickle down to shoppers.

This damages overall food production as the inability to purchase the commodity could lead to a decline in crop yields, with spring planting season already underway.